PETALING JAYA: Kronologi Asia Bhd’s (KAB) profit margin is expected to improve as China’s easing of lockdown measures benefits the group’s as-a-Service (AAS) segment.
Apex Securities said the AAS segment of the enterprise data management (EDM) solutions provider saw profit growth, with a 51% increase in revenue year-on-year (yoy) to RM15 .4mil and a nearly 40% increase in yoy net profit to RM2.1mil.
“Momentum has accelerated in the segment and we consider this a good sign for the group as the segment has provided more sustainable revenue,” the research house said.
He said KAB’s AAS segment operates through subscription customers, which would generate a stable revenue stream.
Apex Securities predicted that such a business model would also help mitigate some of the risks in the global economy.
KAB’s AAS business also benefited from the easing of lockdown measures in China, which is its key market. The group’s operations in China recorded a 90% increase in revenue year-on-year to RM17.4 million.
The research house also noted that KAB is moving towards the AAS EDM sales mix from its current high EDM infrastructure technology revenue mix. The group achieves this through investments in equipment and collaborations with industry giants.
“We expect a greater contribution to earnings from the AAS segment going forward,” Apex Securities said.
KAB’s revenue of RM63.1 million for the second quarter of FY2023 (2Q23) was down 15.3% year-on-year (year-on-year) due to lower EDM infrastructure sales. On a quarterly basis (qoq), sales increased by 10.1%. “The decline in EDM infrastructure sales is the result of a slowdown in infrastructure investment by the group’s customers, primarily caused by uncertainties in the global economy and supply chain disruption,” said Apex Securities.
KAB’s net profit fell nearly 40% year-on-year to RM3.1 million. As a result, profit margins fell by 1.9 percentage points. Meanwhile, for qoq, net profit increased by 40.3%.
“This was due to rising financial costs and depreciation of property, plant and equipment resulting from investments in infrastructure equipment,” the research house said.
Apex Securities said the group’s performance fell short of its expectations, with earnings for the first half of fiscal 2023 accounting for 25% of the research house’s full-year forecast.
Overall, KAB maintained a strong balance sheet with RM91.3 million in cash, RM46.3 million in debt and a leverage ratio of 0.28 times.
“With a strong balance sheet, KAB is able to minimize its risks during the economic downturn. The 0.28 times debt to leverage ratio has mitigated the group’s risk of default in debt repayment and any pressure from high interest rates,” Apex Securities said.
Despite maintaining a call to buy with an unchanged target price of 56 sen, Apex Securities lowered its earnings forecast given potential risks such as a slowing Chinese economy and rising labor costs. work.
The research house said new coronavirus outbreaks and slower exports are likely to weaken China’s economy.
This posed headwinds to KAB’s operations at its subsidiary, Quantum China Ltd.
Apex Securities said labor costs accounted for 60% to 70% of the group’s total operating costs.
“Wage or labor cost growth is accelerating this year, along with inflation and increasing competition for talent. This posed a downside risk to the group’s profit margin,” the research house said.