Hit by Lockdowns

KESM’s 9MFY20 results were below expectations, largely impacted by the lockdown in China earlier in the year, which eventually also hit its Malaysian operations. 3QFY20 revenue was down sharply and we anticipate another weak quarter ahead. Consequently, we cut FY20E EPS by 71% but upgrade the stock to a HOLD as earnings are likely to have bottomed in FY20 while ample market liquidity may prevent the stock price from revisiting earlier lows. Cash also accounts for 67% of its stock market capitalization. TP is raised to RM7.30 based on 0.8x its book value.

3QFY20 Slips Into a Loss

KESM felt the brunt of the lockdown in China in the earlier part of the year before the Movement Control Order was implemented in Malaysia on March 18, which later impacted its Malaysian operations. Due to the disruption in operations, 3QFY20 revenue fell a sharp 29% yoy, resulting in a loss for the quarter. While headline losses amounted to RM3m, this included a RM2.3m fair-value loss for its investment securities.

Weaker 9MFY20, Below Expectations

Negative impact from Covid-19 has prolonged the turnaround in the automotive sector. 9MFY20 results were thus significantly weaker than expected (only accounted for 53% and 30% of our and street FY20 estimates) largely due to the pushback in the demand recovery and supply chain disruptions. KESM is likely to encounter another weak quarter in 4QFY20 and as such we cut FY20E EPS by 71%.

Upgrade to HOLD With Higher Target Price of RM7.30

We remain cautious on the outlook for the automotive sector given the weak global macro environment. Order visibility remains short and uncertainty still looms over sustainability of a rebound in activities post the lockdowns. Earnings predictability over the near term thus remains low and we are of the view that earnings are unlikely to recover to the 2018 peak in the near term. Having said that, we think that earnings should trough in FY20 and recover thereafter. With ample market liquidity, the stock price may also not correct sharply as earlier anticipated. As such, we change our valuation method to P/BV and based on a 10-year mean PBV of 0.84 and its CY21 Book Value, we fairly value KESM at RM7.30 (previously based on 14x FY21E EPS). Upgrade to HOLD from Sell. Key downside/upside risks include a loss/gain of customers and a reduction/gain in outsourcing opportunities.

Source: Affin Hwang Research - 3 Jun 2020