Affin Hwang Research starts coverage of KESM with Buy call

KUALA LUMPUR: Affin Hwang Capital Research has initiated coverage of KESM with a buy rating and target price of RM11 based on 12 times its calendarised 2017E EPS, for upside potential of 58%. 

It said on Monday it sees solid growth prospects for KESM in the automotive space, where there is a strong working relationship with customers and expansion into the testing business. These should drive a three-year-forward earning sper share (EPS) compounded annual growth rate of 35%.

The research house also said the other factors were its hands-on and forward-looking management team.

Although valuation comparables are limited as competitors are mainly integrated device manufacturers (IDM), closest peer Trio-Tech in the US trades at a 14 times 2016E EPS. 

“KESM also trades on average at a 56% discount to automotive-related IDMs’ 2016E PE of 20.7x. Thus, at a 2017E PER of eight times, valuation looks attractive. Our target price of RM11 (12 times calendarised 2017E EPS) offers 58% upside,” it said. 

To recap,  Affin Hwang Capital Research said KESM recorded a strong 2012-15 EPS CAGR of 32%. 

“We believe the solid growth is sustainable, underpinned by focused growth in the automotive business and margin expansion from improved product mix and growth in the high-margin testing business. 

“Hence, despite the 34% stock price outperformance ytd, we think valuations remain attractive and expect a continued PE re-rating,” it said.

The research house said KESM provides a good proxy to the stable and growing automotive semiconductor segment, in our view. With strong growing demand for electronics for vehicles, from safety to infotainment and autonomous vehicles, and it believes KESM is in the right segment to benefit from an automotive structural growth story. 

“We see several re-rating catalysts for the stock, including a strong earnings upcycle and PE expansion, as awareness on the stock remains low and institutional holdings are limited,” it said.