Kenanga Research & Investment

KESM Industries - Green Shoots of Recovery

Publish date: Thu, 09 Mar 2023, 09:13 AM

KESM’s 1HFY23 results met expectations. The group registered a net loss as revenue declined 18.2% due to lower loading volume from the burn-in and test segment, and the cessation of its EMS segment. Nevertheless, revenue improved 6.1% QoQ despite the lockdowns in China. The group anticipates a better 2HFY23 as it transitions into new EV chips. We keep our earnings forecasts but raise our assetbased TP by 25% to RM8.26 (from RM6.60). Maintain MARKET PERFORM.

Within expectations. 1HFY23 net loss of RM3.8m (vs. net profit of RM3.9m in 1HFY22) was within our expectation as the group had already pre-empted the investment community on the weaker performance in 2QFY23 owing to lockdowns in China.

Results’ highlight. YoY, 1HFY23 revenue came in 18.2% lower owing to reduced volume for its burn-in and test services as well as the loss of contribution from the electronic manufacturing service (EMS) segment which was scaled down as it was considered no longer lucrative due to elevated material cost. However, on a QoQ basis, it is worth noting that the group’s 2QFY23 (Nov-Jan) revenue trended 6.1% higher despite the lockdown restrictions in China as well as the Chinese New Year break in January. Operating expenses were inevitably higher QoQ due to the new electricity tariff that took effect in 2023 as well as increased depreciation for new equipment.

Tail-end of its restructuring. Following the cessation of its EMS business and older generation products, KESM is looking forward to the transitioning of new chips relating to electric vehicles (EV). The group has invested c.RM140m worth of new test equipment and is anticipating a gradual uptick in loading volume towards the 2HFY23.

Forecasts. Maintained.

Although forecasts are maintained, we raise our TP by 25% to RM8.26 (from RM6.60) based on FY24F PBV of 1x (previously 0.8x) as we rolled forward our valuation base. We remove the discount to its PBV valuation owing to improving prospects as it transitions into new EV-related projects. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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 still faces potential risk of sub-optimal loading volume during the transitionary period. Maintain MARKET PERFORM.

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 - 9 Mar 2023

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