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Still not out of the woods

■ FY7/21 results missed expectations as KESM remains in the red due to lower than expected utilisation following various MCO implementation in 4QFY7/21.
■ We expect a stronger FY22F, driven by improving auto semicon supply chain situation. Reiterate Hold with a higher RM12.20 TP. We prefer Inari and MPI.

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Sequentially lower utilisation due to impact from FMCO

Revenue in 4QFY7/21 fell 5.1% qoq to RM58m due to lower utilisation amid the nationwide implementation of Full Movement Control Order (FMCO) in Jun, followed by extended lockdown measures in Selangor in Jul. In spite of the lower sales delivery, EBITDA margin expanded 2.1% pts qoq in 4QFY21 to 21.7%, largely due to favourable sales mix geared towards burn-in and test service. This was reflected in the 25.1% qoq drop in raw materials and consumables used during the quarter. Overall, KESM posted narrower core net loss of RM2m in 4QFY21 (vs. RM3m core net loss in 3QFY21).

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Narrowing losses in FY7/21

FY7/21 revenue grew 3% to RM248.3m, mainly due to higher sales from the electronics manufacturing services (EMS) segment, while revenues from its burn-in and test services were disrupted by various movement control orders (MCOs) and ongoing disruptions in the automotive semiconductor and components supply chain. Despite the higher sales, FY21 EBITDA margin still fell 2.4% pts due to unfavourable sales mix as raw materials and consumables expenses rose 63.5% to RM36.9m. Nevertheless, the lower profitability was partially offset by lower depreciation and tax expenses. Overall, KESM posted RM7.3m headline net profit in FY21 against RM96k headline net profit in FY20. Stripping
out the one-off items such as RM7.9m gain on PPE disposal and RM3.3m fair value gain for its investment securities, KESM posted a narrower RM3.8m core net loss in FY21 (vs. RM5.6m core net loss in FY20). The group declared a final DPS of 6 sen, bringing full year DPS to 9 sen, in line with our expectation.

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Cautiously optimistic for a FY22F turnaround; retain Hold

We are cautiously optimistic that KESM will return to profitability in FY7/22F in view of the improving automotive semiconductor supply chain situation in CY22F and minimal operation disruption following higher Covid-19 vaccination rates among its staff; we understand that it has to date achieved a vaccination rate of over 90%. Moreover, the group remains confident that demand for burn-in and test services for automotive chips going into infotainment, powertrain and advanced driving system applications will continue to rise, driven by higher electronics content value growth in automotive. We
raise our FY22-23F EPS by 4-9%. We keep our Hold recommendation on the stock, with a higher RM12.20 TP, as we roll over our valuation to end-2022F. We still peg our valuation to 1.4x P/BV, which is in line with its 5-year historical mean. We prefer Inari and MPI for exposure to the Malaysian semiconductor assembly and test (OSAT) sector.