Affin Hwang Capital Research Highlights

Author: kltrader   |   Latest post: Tue, 24 Nov 2020, 4:57 PM


KESM Industries - A Delayed Recovery

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KESM’s 6MFY20 results were below expectations. The recovery that we were anticipating has likely been pushed back due to the weak external environment. Covid-19 is likely to negatively impact earnings while the recent oil crisis could also push back consumption spending on automotive. We cut FY20-22E EPS by 21- 45% to reflect a delayed recovery but believe that KESM is well positioned to benefit from the next upturn. Its strong net cash position and management also appeal. Maintain HOLD with an unchanged 12-month TP of RM8.21.

Weaker 6MFY20, Below Expectations

Despite the weaker 6M20 revenue (-14% yoy), KESM reported an 18% yoy increase in core profit. As profit margins have remained relatively stable (EBITDA margin down -0.2ppts yoy to 27.4%), the earnings improvement has largely been driven by a reduction in depreciation (-17% yoy). We understand that most of its older equipment has been fully depreciated while the recent cutback in capex has helped to lower depreciation levels. 6MFY20 capex only amounted to RM5m, from Rm17m a year ago. Overall, results were nevertheless below our and street expectations, accounting for only 23% and 26% of our FY20 respective estimates. The variance against our forecast was largely due to lowerthan-expected revenues. We had previously expected the automotive segment to see stronger improvement after several quarters of weakness.

Sequentially Weaker

Revenue and earnings were weaker qoq and likewise profit margins. Notably, despite the weakness in the sector, we think that KESM is holding up fairly well despite the adversities. The company is likely to be well positioned to benefit from the next upturn, although there are likely still to be near-term challenges given the weak external environment.

Maintain HOLD With Unchanged Target Price of RM8.21

We cut FY20-22E EPS by 21-45% to account for the delay in a sector recovery. Management also cited that its China operations have been impacted by the Covid-19 outbreak. Despite the earnings cut, our target price is unchanged at RM8.21 after rolling forward our valuation horizon to FY21 from CY20 previously, but based on the same target PE multiple of 14x. Key downside/upside risks include a loss/gain of customers and a reduction/gain in outsourcing opportunities.

Source: Affin Hwang Research - 11 Mar 2020

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