Affin Hwang Research retains Buy on KESM with RM11 target price

As a tester for the integrated circuits (IC), KESM expects the growth catalyst for the semiconductor sector to be driven by the automotive industry moving forward.

KUALA LUMPUR: Affin Hwang Capital Research is retaining its Buy call for KESM with a target price of RM11 after delivering a set of 1HFY17 results which were slightly ahead of expectations.

It said on Friday that the earnings momentum remains positive, driven by recent investments in the automotive test space. 

“Valuations remain cheap at 11 times CY17E earnings per share (EPS). Maintain BUY and target price of RM11,” it said. 

KESM reported stronger core net profit of RM19.6mil, up 39% from a year ago. This was despite the 11% on-year increase in depreciation charges, largely for investment in fixed assets in prior years. 

The 1HFY17 earnings growth was driven by slight margin improvement (1H17 EBITDA margin of 32.3% vs 32.1% a year ago) but more so due to the 16% on-year growth in revenue. 

“As bulk of its revenue is predominantly in Ringgit, revenue growth can be attributed to the higher capex investment over FY14-16, which is now starting to bear fruit. 

“On the whole, results were slightly ahead of our forecast and the street (54% and 53% of full year FY17 forecasts). The variance against our forecast is due to the revenue coming in slightly ahead of expectations and a lower-than-expected tax charge. We are however leaving our estimates unchanged for now,” it said. 

Affin Hwang Research said KESM’s price-to-earnings valuation remains cheap, trading at 11 times its CY17E EPS. 

It said not many companies can offer a compelling growth story and moreover a niche player in the automotive burn-in and test segment, which is expected to benefit from a strong structural growth in the years ahead.