3QFY21 CNP of RM0.7m (-79% QoQ) brought 9MFY21 CNP to RM5.5m (+62% YoY), which is below our and consensus expectations, accounting for only 53%/50% of our/consensus’ full-year estimates. Improvements in revenue largely came from the EMS division while the burn-in and test division continued to lag behind the bullish sales figures in the automotive market. We believe early positive signs may likely be seen in mid-FY22, as the group prepares for a new 50k sq. ft. plant in Melaka. Maintain MARKET PERFORM with a lower Target Price of RM12.00.

Below expectations. 3QFY21 CNP of RM0.7m (-79% QoQ) brough 9MFY21 CNP to RM5.5m (+62% YoY), which is below our and consensus expectation, accounting only 53%/50% of our/consensus’ estimates. Note that we excluded RM0.15m worth of gain from investment securities which we deem to be non-core to the group’s business operation.

Results’ highlight. YoY, 3QFY21 revenue grew 13% to RM61.1m owing to the recovery in volume for burn-in and test services. As a result, the group recorded CNP of RM0.7m (vs. CNL of RM3.0m). Cumulatively 9MFY21 revenue picked up but was still 2.3% shy at RM190.2m when compared to 9MFY20. However, CNP rose 62% to RM5.5m owing to better cost control which led to 1.6ppt improvement in EBIT margins QoQ, 3QFY21 CNP fell 79% on a 10% slide in revenue due to the festive holidays in February which lengthened factory down time.

Delayed recovery. While the global automotive market has recorded very strong sales figures both in China (Jan-Apr: +53% YoY) and Europe (Jan Apr: +24.4% YoY), we have yet to witness this optimism being reflected in the group’s earnings. The improvements so far are coming from the electronic manufacturing services (EMS) segment which is at low teens o group revenue compared to typical single-digit contribution.

Still hopeful in the longer term. Due to the group’s structure as an “in source” testing facility to its key customers, KESM is expected to see some time lag before experiencing the tailwinds from the automotive sector. In the longer run, the group remains optimistic of the automotive semiconductor market. We believe early positive signs may emerge in mid-FY22. To prepare for that, KESM has committed RM10m for a 50k sq ft. plant (c. +17% of existing floor space) in Melaka to cater for potentia increase in 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.

Reduce FY21E and FY22E CNP by 32% and 16% to RM7.0m and RM18.4m, respectively, to account for delayed ramp-up and impacts from the chip shortage.

Maintain MARKET PERFORM with a lower Target Price of RM12.00 (previously RM14.20) based on FY22E PER of 27.8x, in line with 3-year mean.

Risks to our call include: (i) faster-than-expected ramp-up in volume for burn-in and test services, (ii) faster-than-expected adoption of new semiconductor modules in automobiles, and (iii) sudden surge in customer’s forecast.

Source: Kenanga Research - 28 May 2021