KESM to post robust earnings until FY20, says CIMB Research

KUALA LUMPUR: CIMB Equities Research expects robust FY17-20F net profit compounded annual growth rate (CAGR) of 20% for burn-in tester KESM, driven by strong automotive semiconductor IC testing demand. 

It said on Friday KESM’s capacity expansion will support earnings growth. 

“KESM raised its capex from RM42mil in FY16 to RM140milin FY17 to add new testing capacity; we estimate this raised its testing capacity by 20%,” it said. 

CIMB Research does not expect the appreciation in ringgit against US$ to bring material earnings impact to KESM, given that the majority of its transactions are in ringgit.  

“We maintain our Add rating and RM22 target price, based on 13.5 times CY19F P/E, a 10% discount to the Malaysian outsourcing semiconductor assembly and test providers' mean of 15 times. 

“We think the discount is justified as KESM is a smaller test service provider by market cap compared to its peers. 

“We see stronger earnings delivery and higher dividend payout as potential re-rating catalysts. Key downside risks to our call are tightening wafer supply at its customers and slower electronics content adoption in automotive,” it said.

In the first ended Jan 31, 2018, KESM’s revenue rose 11.6% on-year to RM182.2mil, driven by higher demand for burn-in and testing services, and new capacity expansion.

 As a result of higher operating leverage, EBITDA margin expanded 2.7 percentage points on-year to 34.7% in 1HFY18. 

However, depreciation expenses rose 27% on-year following the addition of machinery and test equipment to support the group’s capacity expansion, while effective tax rate increased to 14.8% (vs. 12.2% in 1HFY17). Overall, 1HFY18 EPS increased 12.8% on-year to RM22.6mil. 

“We expect stronger earnings performance in 2HFY18F, driven by higher volume loading following the improving supply chain situation at its customers and resilient demand for semiconductor components in automotive applications. In the past five years, its 2H earnings accounted for 51-74% of its earnings. 

“Management expects capex in FY18 to normalise to RM70mil to RM80mil vs. RM140mil in FY17. It also expects higher volume demand from smaller automotive semiconductor manufacturers following its new design wins,” it said.