KESM recorded yet another underwhelming quarter in 3QFY22 with CNL of RM2.0m (-94.9% QoQ; -365% YoY) which further depressed 9MFY22 CNP to RM1.9m (-64.3% YoY). The results came in below expectation, accounting for merely 37% of our, and 23% of consensus, estimate. 9MFY22 revenue remained flat YoY but CNP plunged 64% YoY on lower other income while other expenses rose because of higher staff cost and equipment repair cost. Outlook remains cloudy due to the lack of new products in its portfolio. Maintain MARKET PERFORM with a lower Target Price of RM8.30.

Below expectations. KESM recorded yet another underwhelming quarter in 3QFY22 with CNL of RM2.0m (-94.9% QoQ; -365% YoY) which further depressed 9MFY22 CNP to RM1.9m (-64.3% YoY). The results came in below expectation, accounting for merely 37% of our, and 23% of consensus, estimate.

Results’ highlight. QoQ. 3QFY22 sank into the red again with CNL of RM2.0m (vs. RM1.0m CNL in 2QFY22) even after adding back fair value losses from investment securities. Revenue slid 9.5% QoQ to RM58.2m on reduced contribution from the EMS business as the group after many quarters of hesitation, finally decided to scale down its EMS segment which had become financially unviable given the rising cost of production. To recap, the EMS business was initially introduced into the group as a measure to offset the low cycles of its burn-in business.

YoY, 3QFY22 revenue slid 4.8% while CNP fell 365% on poor utilisation rate while other expenses such as staff cost continued to rise. This is further illustrated in its cumulative figures as 9MFY22 revenue remained flat YoY but CNP plunged 64%. The group attributed the margin erosion to: (i) lower other income (-69% YoY) due to the absence of machinery disposal, (ii) higher employee benefit (+4% YoY), and (iii) increase in other expenses (+13% YoY) allocated for maintenance of equipment and portfolio fees for investment securities.

Gloomy outlook. Although automotive semiconductors are still highly sought after in the current market, the group continued to exhibit lagging performance compared to its peers in the same space. While others are running at peak utilisation rate to address the shortage of automotive chips, KESM’s utilisation rate mains sub-optimal for many quarters. We believe that the turnaround of KESM will highly hinge on the introduction of new generation automotive chips, but at the same moment where matured chips are still in severe shortage, the time it takes for that to happen may not suit the current risk appetite of the investing community.

Reduce FY22E CNP and FY23 CNP by 65% and 28% to RM1.8m and RM10.1m, respectively.

Maintain MARKET PERFORM with a lower Target Price of RM8.30 (previously RM8.50) based on 1x CY22E PBV, representing -1SD of 5- 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 - 27 May 2022