PETALING JAYA: KESM Industries Bhd’s new test platforms for its automotive customers are currently undergoing certification, with the completion of RM154mil in major capital expenditure for new burn-in and test equipment, says Kenanga Research.
Based on a recent meeting with KESM, the research house said the group expects its utilisation rate for the automotive business to begin moving upwards to 70% in 2024 from its current levels of 50% to 55% in the second quarter of the financial year 2023 (2Q23).
In addition, the new test platforms will handle updated chips related to the advanced driver-assistance system as well as the tyre pressure monitoring system for electric vehicles, Kenanga Research said in its report yesterday.
On a more subdued note, KESM said it is still facing weakening demand in its non-automotive segment, higher electricity costs and rising depreciation.
“The higher electricity costs are due to an increased tariff in 2023 and weakening loading volume for its non-automotive segment’s burn-in and test service business,” added the research house.
Kenanga Research said KESM’s electronic manufacturing services (EMS) business has been scaled down to the point that it has no material bearing on its overall operation.
“The group will maintain its current workforce of some 1,900 workers, who will be able to cover its operations, including its new test platform.
“However, there will still be lingering unabsorbed overheads that will need to be taken care of.
“These are in the region of about RM2mil to RM3mil due to the ongoing training of workers from the EMS segment to the burn-in and test service businesses,” the research house said.
Given these reasons, Kenanga Research projected KESM to post a net loss of RM4.3mil in FY23, down from a net profit of RM1.2mil in FY22, and cut its FY24 net profit forecast by 22%.
It has also trimmed KESM’s target price to RM8.24 from RM8.26 previously.
Kenanga Research, which maintained a “market perform” call on KESM, added that it likes the group overall for being a proxy for the promising prospects of automotive semiconductors.
In addition, the group, which is one of the largest independent burn-in and test service providers in Malaysia, could potentially benefit from multinational corporation expansions in the country.
KESM’s physical presence in China could also ride on the government’s ambitious plans for the semiconductor industry, said the research house.
However, Kenanga Research did share a sentiment of caution.
“We remain cautious in the immediate term as the group still faces the potential risk of sub-optimal loading volume during the transition period,” Kenanga Research noted.
The risks to its call include delays in the ramp-up in volume for burning and test services, slow adoption of new semiconductor modules in automobiles, and additional restructuring costs in its EMS division.