KUALA LUMPUR: Affin Hwang Capital Research has maintained its Buy call on KESM Industries Bhd
as FY17 core net profit came in above expectations.
"KESM’s FY17 revenue and pretax profit were 2% and 3% above our expectations respectively. FY17 EBITDA margin at 33.6% came in slightly above our forecast of 33%, probably due to a higher degree of testing work undertaken.
"At the core profit level, FY17 earnings were 12% above our forecast. This was however due to a negative tax charge in 4Q17 and hence a lower than expected FY17 effective tax rate of 8% vs 15.3% in FY16.
"We suspect this could be due to investment tax allowance following KESM’s aggressive capex plan (RM107mil in FY17, which is nearly equivalent to its EBITDA for the year). DPS for the quarter amounted to six sen bringing FY17 DPS to 12.5 sen (FY16: 7.5sen) which was above our
expectation of 8.5 sen," it said.
The research firm also notes that this was the 11th consecutive quarter of consecutive growth for KESM as Q4 FY17 revenue rose 6% sequentially but core earnings jumped due to the negative tax charge.
"Importantly, revenue momentum remains on an uptrend (11th consecutive quarter of sequential revenue growth) underpinned by KESM’s strong capex expansion into the automotive burn-in
and test segment. Also aiding the margin expansion is the lower amount of EMS work undertaken. This is reflected in the lower raw materials and consumables used, which declined 1ppts yoy to 10% as a percentage of FY17 revenue."
Affin Hwang Research maintains its target price of RM21.80 based on 17x calendar year 2018 EPS. It notes that downside risks include a loss of customers and a reduction in the outsourcing opportunities as customers increase their in-house burn-in and test functions.
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