• FY20 profit down 95% due to weaker demand.
• Results were below market and our expectations. We cut FY21-22E EPS by 20% and 12% respectively.
• Maintain Hold but with a higher TP of RM8.60

Losses widened in 4QFY20, but largely due to a high tax charge

KESM reported a wider core net loss in 4QFY20 of RM3.6m. This was a result of lower revenue (-12% qoq) but also largely due to a jump in the tax paid of RM1.7m during the quarter, which exceeded the 4QFY20 pretax loss of RM1.6m. Earnings have continued to contract for the fourth consecutive quarter, but largely due to the weaker demand as a result of the ongoing Covid-19 pandemic.

FY20 earnings collapsed by 95%, below expectations

Full-year core profit of RM0.4m was well below our and street expectations of RM2.2m and RM4m respectively. The negative surprise was, however, largely due to the high tax charge in 4QFY20. Revenue and margins were largely in line with our expectations, with the sharp contraction a result of lower productivity due to lockdowns in China in the earlier part of the year and later in Malaysia. Overall, despite the weak performance, management has managed to preserve its EBITDA margins, which were down 0.8% yoy, despite the 22% YoY fall in revenue. Moreover, despite the weak performance, management has proposed a DPS of 6 sen or cumulatively 7.5 sen for FY20. This is commendable and backed by its healthy cashflows and strong net cash position of RM200m.

Maintain Hold

KESM posted its third consecutive year of profit decline in FY20, which was exacerbated by the Covid-19 pandemic. However, we believe that earnings are likely to have hit a trough, though a strong recovery may not be imminent because of the weak global macro environment. Nevertheless, we remain upbeat on KESM’s longerterm prospects, especially the onset of electric and autonomous vehicles. Being the largest independent burn-in provider globally, we think that KESM is poised to benefit from this secular trend. We ascribe a higher target P/BV of 1x on its CY21E Book Value and now value KESM at RM8.60, as the sector gradually improves and moves into recovery phase (previously RM7.30 based on 10-year mean P/BV of 0.84). Maintain HOLD. Key downside/upside risks include a loss/gain of customers and a reduction/gain in outsourcing opportunities.

Source: Affin Hwang Research - 23 Sept 2020