2QFY20 CNP came in at RM1.9m, resulting in 1HFY20 CNP of RM6.4m, accounting for 30%/33% of our/consensus’ estimates. The variance was due to seasonally lower utilisation rate which led to a 14% YoY decline in revenue to RM140.5m. We are still sanguine on the company’s earnings recovery, backed by industry shift towards electric vehicles. Maintain OUTPERFORM with a lower Target Price of RM10.20, factoring in delays in operations caused by the recent Covid- 19 outbreak.

Below expectations. 2QFY20 CNP came in at RM1.9m, resulting in 1HFY20 CNP of RM6.4m, accounting for 30%/33% of our/consensus’ estimates. The variance was due to seasonally lower utilisation rate coupled with operational hiccups caused by the Covid-19 outbreak. No dividend declared for the quarter.

Results’ highlight. YoY, 1HFY20 revenue of RM140.5m dipped 14% due to lower volume for burn-in testing services. Seasonally, 2Q is also a weaker quarter for the company as it closes operations for the Chinese New Year festive period. On a bright side, CNP doubled YoY to RM6.4m with EBIT margin increasing 4.8ppt to 7.7%. Cost savings came from a 17% decrease in depreciation (as some equipment was fully depreciated) and a 14% reduction in expenses from lower utilities cost and management fees. In tandem with the company’s goal to become a “smart factory” with better capabilities and efficiencies, the company saw savings from a 4% decline in wages expense as headcount shrunk. QoQ, 2QFY19 CNP fell 34% (after adjusting for RM1.6m gain of asset disposal) on a 5.9% decline in revenue to RM68.1m.

Prospects still bright. We still like the company’s focus as a specialised burn-in testing service for automotive semiconductor component. Prospects are supported by the increasing semiconductor components per vehicle, more so with the indubitable trend of electric vehicle as a substitute for fuel combustion vehicles. Although Jan 2020 passenger car sales in Europe dipped 7.5% YoY, electric car sales soared 121% YoY. This puts the market share of electric vehicle at a record high of 6.6% compared to 3.6% for the entire 2019. Even with the recent slump in crude oil prices owing to the Russia-Saudi impasse, we maintain our view that regulators will not waver from the emphasis on reducing CO2 emission. Hence, car manufacturers are still pressured to get on board with electric vehicles in order to meet emission targets. This will in turn benefit KESM due to higher demand for automotive semiconductor in electric vehicles.

Revise FY20E CNP and FY21E CNP by -24% and -5%, respectively, to account for delayed orders caused by logistical disruption in China.

Maintain OUTPERFORM with a lower Target Price of RM10.20 (previously RM10.80) based on unchanged PER of 18.7x FY21E PER (in line with its 3-year average).

Risks to our call include: (i) later-than-expected recovery in vehicle sales, (ii) slower-than-expected adoption of new semiconductor modules in automobiles, and (iii) worsening US-China trade spat which could potentially lengthen the industry recovery process.

Source: Kenanga Research - 11 Mar 2020