Kronologi Asia likely to see better profit margin

Firm to gain from easing of measures in China

“We are expecting more profit contribution from the as-a-service segment moving forward.” Apex Securities

PETALING JAYA: Kronologi Asia Bhd’s (KAB) profit margin is expected to improve supported by the easing of containment measures in China that benefits the group’s as-a-service (AAS) segment.

Apex Securities said the enterprise data management (EDM) solutions provider’s AAS segment posted growth in earnings, with an increase of 51% in revenue year-on-year (y-oy) at Rm15.4mil and a rise of nearly 40% in net profit y-o-y at Rm2.1mil.

“The momentum has been picking up in the segment and we deem it as a good sign to the group as the segment has been providing more sustainable income,” said the research house.

It said KAB’S AAS segment operates through subscription-based customers which would bring in a steady income stream.

Apex Securities projected that such a business model would also aid in mitigating some of the risks in the global economy.

KAB’S AAS business also benefited from the easing of containment measures in China, which is its key market. The group’s operations in China recorded a surge of 90% in revenue y-o-y to Rm17.4mil.

The research house also noted KAB is moving towards EDM AAS sales mix from its current high revenue mix of EDM infrastructure technology. The group is carrying this out through investment in equipment and collaborations with industry giants.

“We are expecting more profit contribution from the AAS segment moving forward,” said Apex Securities.

KAB’S revenue of Rm63.1mil for the second quarter of financial year 2023 (2Q23) saw a 15.3% decline year–on-year (y-o-y) due to lower EDM infrastructure sales. On a quarter-on-quarter (q-o-q) basis, revenue grew by 10.1%.

“Lower EDM infrastructure sales were a result of slower infrastructure investment by the group’s clients, mainly caused by uncertainties in the global economy and supply chain disruption,” said Apex Securities.

KAB’S net profit fell by almost 40% y-o-y to Rm3.1mil. Hence, profit margins were down by 1.9 percentage points. Meanwhile, for q-oq, net profit went up by 40.3%.

“This was due to higher finance cost and depreciation of property, plant and equipment arising from investment in infrastructure equipment,” said the research house.

Apex Securities deemed the group’s performance to be below its expectations as profits for the first half of financial year 2023, accounted for 25% of the research house’s full-year forecast.

Overall, KAB sustained a strong balance sheet with Rm91.3mil of cash, Rm46.3mil of debt and a debt ratio of 0.28 times.

“With a robust balance sheet, KAB is able to minimise its risk during the economic downturn. The 0.28 times of debt and gearing ratio has mitigate the group’s default risk in debt repayment and any pressure by high interest rate,” said Apex Securities.

Despite maintaining a “buy” call with an unchanged target price of 56 sen, Apex Securities has lowered its earnings forecast given potential risks like the slowdown of China’s economy and rising labour costs.

The research house opined that renewed coronavirus outbreaks and slower exports are likely weakening China’s economy.

This posed some headwinds on KAB’S operations in its subsidiary, Quantum China Ltd.

Apex Securities said labour costs accounted for 60% to 70% of the group’s total operating costs.

“The wage or labour cost growth is accelerating this year, alongside inflation and intensifying competition for talent. This has posed a downside risk to the profit margin of the group,” said the research house.