KESM managed to recover to the black with 1QFY21 CNP of RM1.2m, though accounting for only 7%/11% of our/consensus’ estimates. We deem this in line with our expectation as we anticipate bulk of the earnings recovery to be reflected in subsequent quarters, particularly in 2HFY21. China and Europe’s car sales continue to climb with China gaining at a quicker pace. Macro-wise, industry leader NXP has also turned slightly positive and expects the recent recovery to build a firm base for a better year going into 2021. Maintain MARKET PERFORM with a higher Target Price of RM10.60.

Meet expectations. KESM managed to recover to the black with 1QFY21 CNP of RM1.2m, accounting for 7%/11% of our/consensus’ estimates. We deem this to be in line with our expectation as we anticipate bulk of the earnings recovery to be reflected in subsequent quarters, particularly in 2HFY21. With revenue inching steadily upwards, the net profit improvement is expected to climb at a faster pace going forward, owing to  the group’s high degree of operating leverage.

Results’ highlight. YoY, 1QFY21 CNP fell 73% to RM1.2m while revenue dipped 15.6% to RM61.1m on the back of lower volume for automotive burn-in and testing services during the period. Demand for electronic manufacturing services also declined due to lower orders from customer. Do note that the YoY comparison is less meaningful as this is the first quarter of recovery post Covid-19 lockdown. We estimate the group’s current utilisation rate to be at its breakeven point of 50%-55%, which is an improvement from previous quarter of 20%. QoQ comparison will serve as a better gauge for the group’s recovery as 1QFY21 recorded CNP of RM1.2m (vs. CNL of RM3.3m in 4QFY20). Revenue also increased 32% to RM61.1 from RM46.3m.

Recovery to continue. We are positive on the group’s ability to return into  the black and anticipate the recovery to continue into subsequent quarters as global car sales have come off the bottom with recovery signs. China’s car sales remain strong, extending its growth streak to seven consecutive month of growth. Latest data in October shows 9.3% YoY increase in

passenger car sales. Electric vehicle sale in China grew at a quicker pace of 104% YoY in Oct. Europe’s car sales is recovering but at a modest pace, as sales recorded 3% YoY increase in Sep but fell 7.8% in Oct. On the macro side, we notice the tone of industry leader NXP has turned

slightly positive and is expecting the recovery in recent quarter to build a firm base for a better year going into 2021.

Maintain FY21E and FY22E CNP. While the group has been slower to recover compared to its peers, we expect to see continuous improvement from here on with better prospects in 2021.

Maintain MARKET PERFORM with a higher Target Price of RM10.60  (previously RM8.60) based on higher CY21E PER of 21x (previously 17x), in line with its 3-year mean. We ascribe a higher PER to reflect the group’s improving prospects.

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 - 19 Nov 2020