2QFY21 CNP of RM3.5m (+186% QoQ; +87% YoY) brought 1HFY21 CNP to RM4.7m (-26% YoY). The numbers came in below our estimate but met consensus, accounting for 25%/54% of respective estimates. Note that we have excluded RM2.82m gain from investment securities. We expect the recovery to continue on strong macro demand for automotive, particularly EVs. The group is also investing in additional capacity to cater for higher orders from customers going into FY22 (FYE Jul). Maintain MARKET PERFORM with a higher Target Price of RM14.20.

Below expectations. KESM continued on its recovery path as 2QFY21 CNP of RM3.5m (+186% QoQ; +87% YoY) brought 1HFY21 CNP to RM4.7m (-26% YoY). The actual numbers came in below ours but met consensus, accounting for 25%/54% of our/consensus’ estimates. Note that we excluded RM2.82m worth of gain from investment securities which we deem to be non-core to the group’s business operation.

Results’ highlight. YoY, 2QFY21 CNP rose 87% to RM3.5m while revenue remained flat at RM68.0m. Cumulatively, 1HFY21 CNP declined 26% to RM4.7m on a 8% dip in revenue mainly due to negative impact from the Covid-19 lockdown in the previous quarter. QoQ, 2QFY21 CNP rose 186% to RM3.5m as loading volume for burn-in and testing services gradually inched upwards. Meanwhile, demand for electronic manufacturing services also saw marginal improvement. As a result, revenue increased 11% to RM68m from RM61m.

Investing in new capacity. We anticipate the recovery phase to continue with more meaningful contributions to be seen in early FY22. With revenue inching steadily upwards, net profit improvement is expected to climb at a quicker pace, owing to the group’s high degree of operating leverage. The group has also recently announced that it will be investing RM10m for a 50k sq. ft. plant (c. +17% of existing floor space) in Melaka to cater for higher order forecasts from its automotive customers. The decision to locate the new plant in Melaka is to ease logistical time and cost as a couple of its customers are situated in the area. Overall, macro demand for automotive is still on an upward trajectory as China’s car sales remain strong while Europe’s car sales are showing encouraging numbers. More importantly, the focus from this year onwards will be largely premised on electric vehicles (EV) which we believe will translate into higher demand for burn-in services, in tandem with the increase in semiconductor content in EVs compared to internal combustion engines.

Reduce FY21E and FY22E CNP by 44% and 11%, respectively. While the group has recover slower compared to its peers in 2H 2020, we expect to see continuous improvement here forth with better prospects in FY22.

Maintain MARKET PERFORM with a higher Target Price of RM14.20 (previously RM10.60) based on rolled-over FY22E PER of 27.8x (previously 21x). We ascribe a 3-year mean PER to reflect the group’s improving prospects on better loading volume in FY22.

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 - 10 Mar 2021