KESM’s strong earnings momentum sustained into 4Q16, pushing earnings to record levels. FY16 profits surged 69% yoy on the back of growth in its automotive testing business earnings which also contributed to its margin expansion. Results were within expectations. Maintain BUY and target price of RM11 based on 12x our calendarised 2017E EPS, for upside potential of 38%.

FY16 net profit surges 69% yoy, within expectations

KESM’s FY16 core profit of RM31m (+69% yoy) was within expectations. The stronger earnings yoy was underpinned by growth in the automotive testing business where KESM provides testing for micro controller units and sensors amongst others, largely for automotive IDMs. KESM made a conscious effort to expand its test business 3 years ago with major investments made in this space. These are currently bearing fruit. As a result, revenue grew 9% yoy to RM286m. Alongside revenue growth, FY16 EBITDA margin also expanded by 0.3ppts yoy to 32.2%, as contribution from the higher-margin testing business increased. On the whole, FY16 earnings growth would have been stronger if not for a higher effective tax rate of 15.3% vs FY15’s 12.9%. Separately, the company also announced a final DPS of 3 sen, bringing FY16 DPS to 7.5 sen (FY15: 6 sen). This was however below our forecast of 10.4sen. We suspect that the company is reserving cash for future capex while notably KESM also repaid borrowings of RM35m during the financial year.

4Q16 net profit slipped 2% qoq

Sequentially, 4Q16 core profits slipped by 2% due to softer EBITDA margin (-1.3ppts qoq). We would not be overly worried and believe this could be due to product mix, possibly an increase in its box build business which typically carries lower margins. On the other hand, revenue momentum remains strong, rising 5% qoq to RM75m, its strongest ever.

Maintain BUY and target price of RM11

No major changes to our FY17-18E EPS forecasts and we introduce FY19E EPS of 129 sen (+26% yoy). We continue to believe that KESM is in the position to benefit from the strong growth in the automotive semiconductor segment, underpinned by rising electronic contents, from safety to infotainment and autonomous vehicles. Maintain BUY and target price of RM11 (12x calendarised 2017E EPS) which offers 38% upside potential.

Source: Affin Hwang Capital Research - 22 Sep 2016