KESM’s 1QFY24 results met expectations, marking its second consecutive quarterly profit, driven by a higher loading volume from its burn-in and test services. These could be early signs that its RM143m investment is gradually paying off. We maintain our forecasts, TP of RM7.06 and MARKET PERFORM call.

Within expectations. KESM’s 1QFY24 core net profit of RM0.9m (vs. net loss of RM1.5m in 1QFY23) made up 34% of both our full-year forecast and the full-year consensus estimate. We consider the results within expectations given the volatility in its quarterly earnings.

Results’ highlights. YoY, KESM’s 1QFY24 revenue increased 20.4% on improved loading volume for its burn-in and test services. We believe there had been a gradual production ramp-up from its new equipment with a price tag of RM143m over the past quarters.

On a QoQ basis, its 1QFY24 revenue inched up 3% while its core net profit almost doubled (albeit from a low base) as its plant utilisation improved. This was KESM’s second consecutive quarterly profit, indicating that quarterly earnings momentum had extended from 4QFY23.

More to be desired. While the sustained earnings are encouraging, signalling positive traction for the new investment, our caution persists. The reported earnings remained tepid in absolute terms, and the group had historically exhibited higher earnings volatility compared to its peers. We believe it would be prudent to keep a close eye on the next few quarterly earnings, more so during its transition to new chips for electric vehicles (EVs).

Forecasts. Maintained

We keep our TP of RM7.06 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 providers in Malaysia potentially benefiting 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 - 17 Nov 2023