KUALA LUMPUR: CIMB Equities Research is retaining its Reduce call for burn-in tester KESM with a lower target price of RM7 from RM7.80 as it sees more risks if the semiconductor demand fails to pick up. The last traded price was RM8.50.
It said on Thursday it had met up with KESM's management to discuss the group’s outlook following weak earnings delivery in 1HFY7/19.
To recap, KESM’s revenue in 1HFY7/19 fell by 10.7% on-year mainly due to lower demand for burn-in and testing services.
“We learnt that KESM’s utilisation fell below 45% in 2QFY7/19 (from 50% in 1QFY/19) mainly due to tight inventory control in the supply chain in light of the US-China trade war,” it said.
CIMB Research said KESM highlighted that a few end customers are not replenishing orders but instead, they are adopting book-to-order delivery to maintain lean inventory.
“In spite of higher contract manufacturing projects completion in electronics manufacturing service (EMS) segment in 1HFY19, group core net profit still fell by 82% on-year during the period,” it said.
KESM attributed the decline due to changes in sales mix given that EMS segment offers a low single digit pretax margin compared to burn-in and test services, which offers mid to high teens pretax margin.
Moreover, the group highlighted that the EMS is not a core business for the group, but it helps to cover the overhead cost.
The group does not plan to trim its workforce given that it may need a longer time to replace them. This could affect efforts to ramp up production if demand recovers.
KESM turned less optimistic about a stronger demand recovery in 2HFY7/19 given the ongoing inventory adjustments and uncertainty in the global economy especially due to softening demand in China. The group reiterated lower capex of RM40m in FY19F (vs. RM48m in FY18).
To recap, KESM incurred RM25m capex in 1HFY19. We cut our FY19-21F EPS by 7-30% to reflect lower utilisation due to weak burn-in and testing demand as well as higher opex related to EMS business expansion.
“Following our earnings revision, we keep our Reduce call with a lower RM7 TP, stillbased on 12.8 times CY20F P/E, a 20% discount to our target sector P/E of 16 times.
“We project further downside risk to earnings if industry demand fails to pick up in 2HCY18. Stronger-than- expected demand recovery in the automotive segment is a potential upside risk to our call. However, we see prolonged inventory adjustments due to the trade conflict as a potential de-rating catalyst for the stock,” it said.
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