KESM’s 1QFY23 results missed expectations. It registered another quarterly loss as it scaled down its EMS business. Its burn-in and test segment saw lower demand, resulting in the overall utilisation rate falling below the optimal level. It will still incur overheads over the next 1-2 quarters while the workers are fully retrained and absorbed into the burn-in business. We cut FY23-24F net profit forecasts by 66-40% but only trim our asset-based TP by 1% to RM6.60 (from RM6.65). Maintain MARKET PERFORM.

Below expectations. 1QFY23 net loss of RM1.5m (-153% YoY) missed both our and consensus full-year net profit estimates of RM3.5m and RM3.3m, respectively.

Results’ highlight. YoY, 1QFY23 revenue fell 23.1% as the group continued to wind down the EMS business which the group has decided to discontinue owing to unfavourable margins on sustained elevated materials costs. In addition, the group’s core business — automotive burn-in and testing — also saw lower loading volume. This resulted in the group reporting a net loss of RM1.5m for 1QFY23 due to underutilised capacity.

Capacity realignment. While the majority of the EMS business has fully scaled down in 1QFY22, it will still incur overheads over the next 1-2 quarters while the workers are fully retrained and absorbed into the burn-in business. Meanwhile, KESM is expecting the new investment for equipment will begin commissioning in 2QFY23 and gradually ramp up in 2HFY23.

Forecasts. Reduce FY23-24F CNP by 66-40%.

We like KESM for: (i) being a proxy to the promising prospects of automotive semiconductors, (ii) being one of the largest independent burn-in and test service provider in Malaysia to potentially benefit from MNCs expansions in the country, and (iii) its physical presence in China to ride on the government’s ambitious plans for the semiconductor industry. However, we remain cautious in the immediate term as the group is still in the capacity restructuring phase with 1-2 more quarters of unabsorbed overheads.

Maintain MARKET PERFORM with a lower TP of RM6.60 (previously RM6.65) based on 0.8x FY23F PBV. The 10% discount to its BV is to reflect potential losses that could erode its asset value. The average PBV of 2.8x of its peers may not serve as a good reference given that they are mostly highly profitable. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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 forecast.

Source: Kenanga Research - 21 Nov 2022