KESM reported narrower-than-expected FY23 losses as it returned to the black in 4QFY23 owing to improved contribution from the burn-in and test segment, coupled with reduced losses at the discontinued EMS segment. However, its earnings volatility remains. We raise our FY24F net profit to RM2.7m (from RM0.53m), lift our TP by 2% to RM7.06 (from RM6.91) but maintain our MARKET PERFORM call.

Above expectations. KESM’s FY23 core net loss of RM4.9m was narrower than both our net loss forecast of RM6.8m and the consensus net loss estimate of RM6.1m. The variance against our forecast came largely from the turnaround at its burn-in and testing services in the 4QFY23.

Results’ highlights. YoY, KESM’s FY23 revenue dipped 7.5% due to reduced volume from burn-in and test services. The impact was further exacerbated by the absence of the electronic manufacturing service (EMS) segment's contribution as the group decided to scale down the operation, citing that it was no longer financially viable with the rising increased material costs which it was not able to pass on to customers. The group then focused its efforts solely on revamping its burn-in and test operations with a strategic investment of RM143m over the past quarters which led to early signs of fruition in the 4QFY23 where it returned into the black (vs. our expectation of another quarterly loss). As a result, the group's net loss was capped at RM4.9m.

Still premature. This reported 4QFY23 marks the group’s first quarterly profit of RM0.3m, putting an end to the losing streak over the last six quarters. While it’s an encouraging sign, we retain our conservative view on the company given its highly volatile nature in terms of earnings delivery compared to industry peers. With its strategic RM143m capex completed, the group indicated it is now focused on the transition to new chips for electric vehicles (EVs), which is expected to gradually increase in loading volume. However, we remain cautious given prevailing uncertainties within the semiconductor industry.

Forecasts. We increase FY24F net profit to RM2.7m (from RM0.53m) and introduce our FY25F earnings projecting a 67% growth.

We tweak our TP up by 2% to RM7.06 (from RM6.91) based on an unchanged FY24F PBV of 0.85x, representing a c.20% discount to the average PBV of 1.1x of companies in the technology-related space that are loss-making or barely breaking even, i.e. JCY, AEMULUS, ATAIMS and JHM (MP; TP: RM0.70) to reflect KESM’s low share liquidity. 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) its exposure to the promising automotive semiconductors space, (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 their semiconductor industry. However, we remain cautious for 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) slower-than-expected ramp-up in volume for burn-in and test services, (ii) slower-than-expected adoption of new semiconductor modules in automobiles, and (iii) sudden decline in customer forecast.

Source: Kenanga Research - 22 Sept 2023