4QFY20 CNL of RM3.3m resulted in lower FY20 CNP of RM0.1m (-99% YoY), accounting for only 1.8%/2.4% of our/consensus’ estimates. The group was impacted heavily by global lockdown which led to a 22% YoY decline in revenue to RM241m. Its high operating leverage also exacerbated the impact. However, we expect the group to see a gradual recovery from here on owing to encouraging indications in the global automotive space. Maintain MARKET PERFORM with a higher Target Price of RM8.60.

Below expectations. KESM reported 4QFY20 CNL of RM3.3m, resulting in a lower FY20 CNP of RM0.1m (-99% YoY), accounting for merely 1.8%/2.4% of our/consensus’ estimates. The precipitous decline was due to the Covid-19 lockdown which led to lower production volume. This was further exacerbated by the group’s high degree of operating leverage.

Results’ highlight. YoY, FY20 CNP plunged 99% to RM0.1m while revenue fell 22% to RM241.0m as the group was plagued by the Covid-19 outbreak, causing a slump in demand for automotive burn-in testing services and electronic manufacturing services. However, KESM managed to remain in the black thanks to cost rationalisation efforts. For the year, the group recorded a 6% reduction in employee benefits following lower headcounts coupled with lower depreciation by 20% as some equipment were already fully depreciated. QoQ, 4QFY19 CNL worsened to RM3.3m (vs. -RM3.0m) as the lockdown led to lower plant utilisation rate.

Gradual recovery ahead. We expect the see a gradual recovery ahead as global car sales have come off the bottom with recovery signs. China continued to experience a surge in demand, recording 11.6% YoY growth in August to mark its fifth consecutive month of growth in car sales. Electric vehicle sale in China grew at a quicker rate of 19% YoY for the month of August. Europe’s car sales have also exhibited encouraging momentum coming off the low of -76% YoY in April to a current level of -18.9% YoY in August. Similarly, the demand for electric vehicles in Europe has continued to climb, thanks to regulatory efforts pushing for lower carbon emission among automotive manufacturers. To a certain extent, we believe that the emphasis on social distancing has also contributed to the growing preference for private transportation.

Maintain FY21E CNP and introduce FY22E CNP of RM24.8m, representing a growth of 34%. While the group has been slower to recover compared to its peers, we expect to see gradual improvement from here on with better prospects in 2021.

Maintain MARKET PERFORM with a higher Target Price of RM8.60 (previously RM7.40) based on rolled-forward CY21E PER of 17x, in line with its 5-year mean.

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

Source: Kenanga Research - 23 Sept 2020