KESM expects gradual recovery

KUALA LUMPUR: KESM Industries Bhd is eyeing a gradual recovery over the near term with its utilisation rate approaching 30%, says Kenanga Research, which reiterated its "market perform" rating on the stock.

"For the upcoming quarter, the group is hopeful to breach the 30% mark and expect marginal QoQ growth in 2QFY21," it added.

However, the research house added that management has cautioned about the seasonality factor and long festive holidays in 3QFY21 as the group typically shuts down its plants during the Chinese New Year period.

Moving forward, KESM is seeing orders for products that are in the midst of qualification, including chips relating to advance driving assistance systems, tire-pressure measuring system and in-car infotainment system.

However, the group is not expected to see significant impact from these new products in FY21 as the qualification process takes time, especially for the automotive sector, which is more stringent than the smartphone sector.

New equipment lead time is also now longer at three to four months as the Covid-19 poses logistical challenges.

"Upon qualifying for the new products, capex for new equipment may only be incurred between end-FY21 and early-FY22," said Kenanga.

Over the longer term, management believes the sector has positive prospects as semiconductor content in vehicles continue to rise.

"We gather that China’s car sales remain strong, extending its growth streak to seven consecutive months. Europe has also shown encouraging rebound.

"While we are positive on the group’s recovery, we prefer the likes of D&O (OP; TP: RM2.00) and MPI (OP; TP: RM29.00) which are benefiting from the automotive recovery at a quicker rate, thanks to their niche in LEDs and silicon carbide (SiC) power module respectively," said Kenanga.

The research house maintained FY21 and FY22 core net profit at RM19.5mil and RM24.8mil respectively. Its target price was left unchanged at RM10.60 based on 2021 price-earnings for 21x, in line with its three-year mean.
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