KESM’s new test platforms for its automotive customers are currently undergoing qualification. Upon commissioning, they will handle new chips for EVs, raising its overall utilisation rate from 50% currently to 70% by CY24. On a more subdued note, KESM is still facing weakening demand in its non-automotive segment, higher electricity cost and rising depreciation. We now project a loss in FY23F (from a profit previously), cut our FY24F net profit forecast by 22%, trim our TP RM8.24 (from RM8.26) but maintain our MARKET PERFORM call.

Key takeaways from our meeting with KESM are as follows:

1. With the major capex of RM145m completed for new burn-in and test equipment, the new test platforms for its automotive customers are gradually being certified. KESM expects its utilisation rate for the automotive business (c.70% of group revenue) to begin trending upwards to 70% in CY24 from the current level of 50-55% in 2QFY23. The new test platforms will handle updated chips related to advanced driver-assistance system (ADAS) and tyre pressure monitoring system (TPMS) for electric vehicles.

2. However, it is still facing challenges in terms of higher electricity cost (+5% QoQ) on increased tariff from 2023 and weakening loading volume for its non-automotive (c. 30% of group revenue) burn-in and test business. Meanwhile, its depreciation is expected to trend up from c.RM9m/quarter to RM10-11m/quarter as the new equipment has been fitted into its facility.

3. KESM indicated that its EMS business has been scaled down to a level that it has no material bearing on its overall operation. The group will maintain its current workforce of 1,900 workers who will be able to cover the operations of its new test platform. However, there will still be lingering unabsorbed overhead of c.RM2-3m due to the ongoing reskilling of workers from the EMS segment to the burn-in and test business.

Forecasts. We now project a RM4.3m net loss in FY23F (from a RM1.2m net profit) and cut our FY24F net profit forecast by 22%.

We also trim our TP to RM8.24 (previously RM8.26) based on an unchanged FY24F PBV of 1x. There is no adjustment to our TP based on ESG given its 3-star rating as appraised by us (see Page 4).

Investment thesis. 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 providers 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 transition period. Maintain MARKET PERFORM.

Risks to our call include: (i) delays in the ramp-up in volume for burnin and test services, (ii) slow adoption of new semiconductor modules in automobiles, and (iii) additional restructuring cost in its EMS division.

Source: Kenanga Research - 22 Mar 2023