KMI Wire and Cable (KBLI IJ) – Bright prospects to drive valuation re-rating
March 9, 2017
Although shares of KMI Wire and Cable (KBLI/Not Rated) have jumped >50% YTD, we believe the stock is still attractive. Key investment points include: 1) growing demand for aluminum power transmission cables; 2) its fewer competitors (Voksel Electric [VOKS IJ/Not Rated] is KBLI’s main competitor in supplying aluminum cables to Indonesia’s state-owned electricity company, Perusahaan Listrik Negara [PLN]); 3) stable margin delivery owing to the impact of natural hedging; and 4) expectations for a valuation re-rating.
New facilities to start producing cables for PLN in 2017-18
For FY16, KBLI’s annual capacity stood at 42,000 tonnes (16,000 tonnes for aluminum; 26,000 tonnes for copper). This year, KBLI will start producing high-voltage underground copper (HVUGC) cables after adding 3,000 tonnes of copper cable capacity (for high- and medium-voltage cables). In addition, KBLI will also begin construction on 15,000 tonnes of aluminum cable capacity in 2H17, as management expects aluminum cable utilization to reach 94% (the effective maximum level) this year. The additional 15,000 tonnes of capacity are expected to come online in 2018.
Impressive FY16F stokes expectations for better performance going forward
KBLI’s management estimates that, for FY16, top line reached around IDR2.8tr (+7.6% YoY). Meanwhile, net profit is projected at IDR300bn (excluding a tax revaluation impact of roughly IDR30bn), more than doubling on a YoY basis. In our view, KBLI’s strong performance was supported by a more than twofold increase in PLN’s revenue contribution (to roughly 39%) from the FY14 level.
KBLI expects the revenue contribution of transmission cables to expand during 2017-19, in line with increasing demand from PLN for LVAL-ACCC and LVAL-ACSR transmission cables. LVAL-ACCC is a specialty cable that: 1) can carry two times more current than LVAL-ACSR; 2) reduces the probability of cable sag; and 3) is able to withstand the higher temperatures generated by peak-load power (on which PLN has been relying recently). According to KBLI’s management, the company boasts significant competitive edges over competitors with regard to LVAL-ACCC, which is difficult to produce. Notably, KBLI forecasts that revenue from PLN projects will reach around 51% of total revenue by 2019, which we think will have a positive impact on earnings.
Valuation remains cheap; Re-rating expected
For 2017, KBLI’s management conservatively assumes that bottom line will grow by 18% YoY to reach IDR354bn. This earnings level (EPS of IDR88) translates into a 2017F P/E of 4.9x, which we deem still very attractive. In addition, KBLI is trading at a 71% discount compared to the average 2017F multiple (16.7x) of its peer group, which includes Schneider Electric SE (SU FP equity/Not Rated), Omron Corp. (6645 JT Equity), LS Industrial Systems (010120 KS equity), and TBEA (600089 CH equity).
KBLI is currently trading at its seven-year average P/E. A re-rating to the +2 standard deviation level (11.6x P/E) translates into a share price of IDR1,020/share.