Slipped back into losses in 3QFY22
? 9MFY22 results missed expectations as the group slipped into a core net loss
due to lower-than-expected utilisation from EMS, burn-in and test in 3QFY22.
? We cut FY22-24F EPS by 24-52% to reflect lower utilisation from ongoing
supply chain disruptions and margin pressures from rising costs.
? Retain Hold with a lower RM7.80 TP, now based on 0.9x CY23F P/BV.
Sequentially lower utilisation in 3QFY7/22
KESM Industries’s 3QFY7/22 revenue fell 10% qoq to RM58.2m due to lower sales volume
across both electronic manufacturing services (EMS) and burn-in and test segments. We
estimate that group utilisation fell below 30% in 3QFY22. Meanwhile, raw materials cost
and depreciation expenses slid 20% and 10% qoq, respectively. Headline net loss widened
from RM1m in 2QFY22 to RM2.3m in 3QFY22. Stripping out exceptional items, such as
RM171k for inventories written down and RM372k fair value on investment securities,
KESM slipped into a core net loss of RM1.4m (vs. RM1m core net profit in 2QFY22).
Back in the black in 9MFY7/22
Revenue in 9MFY7/22 grew 0.5% yoy, mainly due to higher burn-in and test services but
this was partially offset by lower sales from the EMS segment. 9MFY22 EBITDA margin
grew by 0.6% pts yoy to 22.6% due to better sales mix as raw material and consumables
expenses fell 35.1% to RM19.4m. Meanwhile, depreciation expense also declined by 6.4%
yoy. Overall, KESM posted a lower RM4.2m headline net profit in 9MFY22 (vs. RM8m net
profit in 9MFY21). Stripping out one-off items such as RM7.9m gain on PPE disposal and
RM2.5m fair value gain for its investment securities, KESM posted a RM2.6m core net
profit in 9MFY22 (vs. RM1.8m core net loss in 9MFY21).
Revising down FY22-24F EPS by 24-52%
We cut FY22-24F EPS by 24-52% on lower utilisation due to the ongoing supply chain
disruption. In the meantime, the group estimates the recent lockdown in key manufacturing
cities in China will likely compound the effect of an already disrupted global supply chain.
Nevertheless, the group is committed to expanding its production capacity to assist
customers meet the supply-demand imbalances. We are sceptical about this move given
that KESM is already running at low utilisation levels and see further capacity additions
leading to lower blended ASP as it struggles to fill excess capacity over the near term.
Reiterate Hold with a lower RM7.80 TP
We keep our Hold rating on the stock with a reduced RM7.80 TP as we now peg our
valuation to 0.9x CY23F P/BV (vs. 1x previously) to reflect the weaker tech sector
sentiment. Our valuation is still 1 s.d. below its 5-year mean of 1.4x in view of weaker nearterm earnings prospects and sluggish sentiment in the tech sector amid a rising interest
rate environment and a prolonged Russia-Ukraine war.