It had on Wednesday cut its FY19-21F EPS by 7%-8% to reflect lower utilisation and sales growth assumptions in China, which is directly impacted by trade war.
“Retain Hold with a lower RM9 TP (12.8 times CY20F P/E). We prefer MPI,” it said.
CIMB Research learnt that KESM’s utilisation fell below 60% in 1QFY7/19 mainly due to inventory adjustment at its immediate customers in light of escalating US-China trade war.
KESM was also impacted by higher raw material costs related to the electronics manufacturing services. The group expects flattish sales in 2QFY19 due to ongoing inventory correction by its customers.
“In spite of the tepid near-term outlook, management is cautiously optimistic for a stronger 2HFY19 following healthy order visibility from its customers for February 2019.
“Nevertheless, it depends on the US-China trade war situation given that KESM’s operation in China has felt the reduction in chip testing volume. Apart from that, we still expect stronger demand and adoption of electric vehicles to drive semiconductor component demand, which bodes well for KESM,” it said.
CIMB Research said KESM is guiding for lower capex of RM40mil in FY19F (vs. RM48mil in FY18) in view of excess capacity following the last expansion in 2017.
To recap, KESM incurred RM10mil capex in 1QFY19. In addition, management highlighted that KESM's depreciation expense has peaked and should gradually decline after FY19F.
“We gather that management could reduce opex by cutting staff costs, but it plans to retain all staff for now in anticipation of strong demand recovery in 2HFY19F,” it said.
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