• Performance turnaround as revenue improves
• Results accounted for 6% of street and our full-year expectations, but we deem the results as inline, expecting further sequential recovery
• Maintain Hold but with a higher TP of RM10.15

Returns to black in 1QFY21

KESM reported a better 1QFY21, showing a marked turnaround qoq after the losses in 4QFY20. While core net profit of RM0.7m is still a far cry from its heydays, the results signal some improvements in the sector that are filtering down to the company. Revenue jumped 32% qoq albeit from a low base, contributing to the better overall performance. Nevertheless, we estimate that nearly a third of the revenue gains likely came from its low-margin EMS business and hence contributed to the weaker EBITDA margin which fell 1ppt qoq. Notably, with an estimated 15% of revenue coming from the EMS segment, overall EBITDA margins at 24% is also the lowest in recent times. While KESM has seen such unfavourable revenue mix in the past, this is likely to have been masked by the higher revenue from its more profitable burn-in and test segment.

6% of full-year expectations but deemed inline

While 1QFY21 core profits only accounted for 6% of street and our full-year forecasts, we deem the results as inline in view of expectations of further sequential earnings recovery ahead.

Maintain Hold

KESM’s stock price has performed well over the past month, in tandem with most recovery plays. With improving sentiments, we think that valuations may continue to overshoot near-term fundamentals. Stock is currently trading at a P/B of 1.2x, slightly above its 5-year historical mean of 1.18x, but has traded up to 2.5x (or close to +2SD above its historical mean) in the recent 2 years. As we move closer towards a vaccine, stock valuations could possibly remain elevated and trade between these levels, even before a stronger earnings recovery. Maintain our Hold rating as we like the company for its exposure to the electric and autonomous vehicles semiconductor market. Target price is raised to RM10.15 based on its mean CY21E P/B (previously at RM8.60 based on 1x its CY21E Book value). Key downside/upside risks include a loss/gain of customers and a reduction/gain in outsourcing opportunities.

Source: Affin Hwang Research - 19 Nov 2020