Still not out of the woods
- FY7/22 results missed expectations as KESM remains in the red due to a wider-than-expected core net loss in 4QFY7/22.
- KESM is cautiously optimistic about FY23F, underpinned by higher semiconductor content value in automotive due to transition to EV and AV.
- Maintain Hold. We prefer Inari for exposure to Malaysian OSAT sector.
Sequentially higher opex in 4QFY7/22
Revenue in 4QFY7/22 fell 4.3% qoq to RM56m due to lower sales from electronics
manufacturing services (EMS) segment, as the group gradually reduced its exposure in
lower margin services. Meanwhile, KESM also incurred a higher opex, mainly related to
repair and maintenance expenses in the quarter. Other expenses rose 18.4% qoq. Overall,
KESM posted a wider core net loss of RM3.1m in 4QFY22 (vs. RM1.4m core net loss in
3QFY22). The group proposed a final DPS of 6 sen, bringing full-year DPS to 7.5 sen
(FY21: 9 sen), below our expectation of 10 sen.
Narrowing core net loss in FY7/22
FY7/22 revenue fell a marginally 0.6% yoy to RM246.7m, mainly due to decline in EMS
sales, however this was partially offset by higher burn-in and testing sales. Despite the
lower sales, KESM incurred higher staff costs due to realignment of resources for burn-in
and test services and severance compensation following the scaling down of the EMS
division. Apart from that, other expenses also rose 22% yoy due to higher repair and
maintenance expenses of RM6.5m, utility cost of RM2.4m, and management fees of
RM1.5m in support of the increase in burn-in and testing services. However, the higher
opex was partially offset by lower depreciation and raw materials cost, in line with lower
EMS sales. Overall, KESM posted a lower RM1.7m headline net profit in FY22 against
RM7.3m net profit in FY21. 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
RM500k core net loss in FY22 (vs. RM3.8m core net loss in FY21).
Cautiously optimistic for a FY7/23F turnaround
We are cautiously optimistic for KESM to return to profitability in FY7/23F in view of the
improving automotive semiconductor supply chain situation in CY23F. Moreover, the group
remains confident that demand for burn-in and test services for automotive chips going into
infotainment, powertrain and advanced driving systems will continue to rise, driven by the
automotive industry’s transition into electric vehicles (EV) and autonomous vehicles (AV).
Maintain Hold with a lower RM7.30 TP
We keep our Hold rating on the stock with a lower RM7.30 TP, based on a lower 0.85x
P/BV (vs. 0.9x previously), as we update our target multiple to reflect the weaker sentiment
in the tech sector. We also roll over our valuation to end-2023F, still pegged to -1 s.d. below
its 3-year mean P/BV of 1.15x in view of weaker near-term earnings prospects and sluggish
sentiment in the tech sector amid a rising interest rate environment.