KESM’s revenue and earnings momentum remained strong. Earnings are broadly within expectations and we expect robust earnings momentum ahead underpinned by aggressive capex into the automotive burn in and test business. Maintain BUY and target price of RM21.80 based on 17x our calendarised 2018E EPS.

1QFY18 Core Profit Jumps 12% Yoy, Within Expectations

KESM’s 1QFY18 core profit jumped 12% yoy to RM10.7m driven by revenue growth of 13.2% yoy and a 4ppt yoy increase in the EBITDA margin to 35.5%, the highest recorded by the company. So far, while revenue accounted for 23% of our FY18 forecast, we expect it to progressively increase as contribution from its new equipment business kicks in. KESM’s capex of RM107m in FY17 was its highest level ever as it geared itself for further expansion into the automotive burn in and test segment. We expect the capex to contribute positively in the quarters ahead. Overall 1QFY18 net profit could have been stronger yoy if not for a higher effective tax rate of 15.5% vs 10.4% in 1Q17.

Sequentially Weaker, Distorted by Higher Tax

Sequentially, 1QFY18 revenue improved marginally (+1.1%) as there was some slowdown in the first 2 months of the quarter, but activity picked up pace in October 2017. The EBITDA margin also improved by 0.7ppts qoq to 35.5% despite the slowdown, indicating that the new business is more profitable. Net earnings were lower by 19% qoq only due to the positive tax charge in 4QFY17. At the pre-tax level, earnings grew 5% qoq due to revenue and margin expansion.

Maintain BUY and Target Price of RM21.80

We maintain our BUY rating and 12-month TP of RM21.80 (based on 17x CY18E EPS). We continue to favour KESM for its strong positioning in the automotive semiconductor market, which we believe will continue to experience above-average industry growth due to rising electronic content, a result of increased safety and infotainment in vehicles and the growth of autonomous vehicles. Key downside risks include a loss of customers and a reduction in the outsourcing opportunities as customers increase their inhouse burn-in and test function.

Source: Affin Hwang Research - 23 Nov 2017