KESM remains nicely positioned, says Affin Hwang

KUALA LUMPUR: Affin Hwang Capital Research reaffirmed its buy call on KESM Industries Bhd with a target price of RM21.80 based on 17x CY18E earnings per share.

In a research note,it said the company is well positioned to capture a production ramp by 4QFY18 while its near-term outlook stays attractive.

"Its capex cycle should remain high at RM70m annually over FY19-20E, which in our
view will further consolidate its position as the largest independent burn-in provider globally, with a niche in the automotive space, an area where we anticipate strong structural growth," it said.

The research firm added that 3QFY18 revenue may remain flattish due to issues at its customers and at assembly houses despite its heavy investment in capex. 

"Nevertheless, near term, despite weaker utilisation rates of 80% (vs. up to 85% in 1Q FY18), the EBITDA margin was slightly firmer at 35.6% (+0.1ppts qoq) a reflection of its favourable product mix and cost efficiency."

Affin Hwang Research added that capex in 1HFY18 amounted to RM28mil and on track to hit RM70mil for FY18E. KESM is likely to maintain these levels as it gears up for stronger growth in the automotive semiconductor segment. 

"In FY17, KESM’s semiconductor chips burn-in and tested registered 19% yoy growth and we believe that a high growth trajectory can be sustained, in view of the company’s planned capex and the structural growth in the semiconductor automotive segment. 

"Moreover as invested capex is spread beyond its major customers (69% of FY17 revenue came from 2 customers), growth should be even more prevalent."

However, the research firm believes management will avoid even stronger capex spending that could lead to sharper revenue volatility.