KUALA LUMPUR: KESM Industries Bhd
continues to offer a compelling proposition in the automotive burn-in and test space, which is expected to see strong structural growth ahead, according to Affin Hwang Capital Research.
“Overall, we like KESM’s strong growth proposition in the automotive burn-in and test space which is expected to offer strong structural multi-year growth ahead. Maintain buy and a target price of RM16.40 (based on 17x calendar year 2017 EPS),” it said.
KESM’s 9MFY17 core profit of RM30mil was ahead of expectations, accounting for 79% and 78 % of Affin’s and street FY17E estimates.
It said the positive surprise was due to better than expected revenue and Ebitda margin coming in slightly ahead of our forecast at 33.2%. 9MFY17 earnings growth was driven predominantly by revenue expansion.
Affin said this was due to the strong capex upcycle that KESM has undergone since 2014, whereby KESM invested in new equipment targeting the automotive test market.
“The even stronger planned capex of RM90mil over FY17-18E should ensure that growth is sustained in the quarters ahead.
“Sequentially, 3QFY17 core profit was up 5% due to revenue growth and 1.5 percentage points improvement in Ebitda margin,” it said.
KESM’s 9M FY17 Ebitda margin improved 0.8 percentage points year-on-year despite continued start-up cost on new investments.
“Besides, we understand that the company is enhancing the production process by increasing the level of automation, which should be long-term positive.
“On this account, we think that the margin improvement is thus impressive, probably driven by prudent cost measures and improved product mix,” Affin said.