PETALING JAYA: KESM Industries Bhd
will continue with its expansion plan despite the current dampened market sentiment.
The group has committed to invest RM44mil in capital expenditure (capex) in the first quarter of financial year 2023 (1Q23) for new equipment, Kenanga Research said.
This is in anticipation of higher demand for burn-in and test services as the group scales down its electronic manufacturing services (EMS) business segment, it said in a report.
That took the group’s total capex to RM100mil in 2022.
However, the transitioning phase could result in unabsorbed labour cost as well as lower utilisation rates due to the ongoing lockdowns in China, it added.
Kenanga Research said more than 90% of KESM’s capex will be catered for its Malaysian operations, with the remainder going to its plant in Tianjin, China.
Commissioning of the new equipment will start in 2Q23 with a further ramp-up in the second half of 2023.
Kenanga Research said KESM is scaling down its EMS business segment and the exercise is expected to be completed by 1Q23.
However, there may still be an unabsorbed labour cost of about RM2mil before its burn-in and test business takes in these additional headcounts when the commissioning of the new equipment starts in the subsequent quarter, it said.
It said KESM’s operations in Tianjin will continue to face adverse impact from the ongoing zero-Covid policy there, which could potentially lead to lower utilisation quarter-on-quarter for 1Q23.
The group, however, remains hopeful of a year-on-year improvement in financial year 2023, albeit at a gradual pace, it said.
The research house kept its forecast and “market perform’’ call on KESM but lowered its target price to RM6.65 per share from RM7.47 previously.
This is based on lower price-to-book value (PBV) to account for the slower performance in the immediate quarters before the commissioning of the new capacity.
The average PBV of 2.5 times of its peers may not serve as a good reference, given they are mostly highly profitable.
Kenanga Research said risks to its call include KESM’s expansion plans thwarted by a potential slowdown in automotive semiconductor demand and teething problems from the retraining of its workers from the EMS segment to the burn-in segment.
The worsening lockdown in China could prevent the group’s Tianjin plant from breaking even, it added.
KESM reported a net loss of RM2.5mil for 4Q22 on lower revenue as the group scales down its EMS businesses besides facing higher expenses for repairs, maintenance and utility.
Revenue for the quarter was down to RM55.6mil. For the full year, its net profit fell by 77% to RM1.67mil while revenue was down marginally to RM246mil.
