2QFY22 CNL of RM1.0m (-135% QoQ; -129% YoY) further depressed 1HFY22 CNP to RM3.9m (-17% YoY), which came in below our, but within consensus, expectation - accounting for 28% and 51% of respective estimates. The 7-day lockdown in Tianjin further added to the group’s struggle causing suboptimal utilisation rate and unabsorbed overhead cost as 2QFY22 revenue dipped 6% QoQ and 5% YoY. Having missed the entire tech run, we anticipate the recovery struggle to continue in FY22. Maintain MARKET PERFORM with a lower Target Price of RM8.50.

Below expectations. 2QFY22 CNL of RM1.0m (-135% QoQ; -129% YoY) further depressed 1HFY22 CNP to RM3.9m (-17% YoY), which came in below our, but within consensus, expectation - accounting for 28% and 51% of respective estimates.

Results’ highlight. QoQ. Just after the group returned to the black in the previous quarter, 2QFY21 dipped into the red again with CNL of RM1.0m (vs. RM2.9m CNP in 1QFY22) as the group continued to suffer challenges posed by the Covid-19 pandemic. Its plant in Tianjin, China was required by the local authorities to shut down for 7 days as part of a partial lockdown protocol following the discovery of 137 positive Covid-19 cases in the area. This led to a 6.2% decrease in revenue to RM64.3m. YoY, 2QFY21 revenue dipped 5.4% to RM58.0m on lower loading volume for its burn-in and test survives as a result of the plant shutdown in Tianjin. Cumulatively, 1HFY22 revenue edged 3% higher to RM132.9m but CNP fell 17% to RM3.9m on higher operating cost.

A series of challenges. Having to cope with sub-optimal utilisation rate and unabsorbed overhead cost, the recent lockdown in Tianjin further compounded the setbacks that KESM was experiencing throughout the past two years while its peers were posting record earnings quarter after quarter. The group continues to exhibit lagging performance despite being in the highly demanded automotive semiconductor space. We believe this is likely due the improvements in customer’s design of chips which require less burn-in services from KESM.

In need of new products. We believe KESM’s utilisation rate for the period in review is still at sub-30% given its lacklustre performance. While the management envisions a gradual recovery, we opine that the group is in serious need of converting its new product introduction into mass production as its existing legacy products are seeing less requirement for burn-in services. Failing to do so puts the group at risk of missing out from the fast-evolving automotive semiconductor space.

Reduce FY22E CNP and FY23 CNP by 63% and 34% to RM5.3m and RM13.9m, respectively.

Maintain MARKET PERFORM with a lower Target Price of RM8.50 (previously RM11.40) based on 1x CY22E PBV (previously 27.8x PER), representing -1SD of 5-year mean. We switch to PBV from PER valuation to account for the earnings volatility and lacklustre outlook.

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 - 9 Mar 2022