KESM Industries Bhd
(Sept 24, RM17)
Maintain hold with a higher target price (TP) of RM18.50: KESM Industries Bhd’s revenue in the fourth quarter ended July 31, 2017 (4QFY18) grew 3.6% quarter-on-quarter (q-o-q) to RM85.3 million due to higher electronic manufacturing services (EMS) contribution amid lower plant utilisation for burn-in and tests as a result of wafer supply constraints.
Despite higher revenue, earnings before interest, taxes, depreciation and amortisation (Ebitda) margin fell 0.9% to 33.2% due to lower EMS margins. Nevertheless, KESM’s core net profit surged 64% q-o-q largely due to a reversal in tax expenses in the quarter, after stripping out RM1.4 million in fair value gain on investment securities. Financial year 2018 (FY18) revenue rose 3.5% year-on-year (y-o-y) to RM350 million, driven by higher demand for burn-in, testing and EMS services as well as new capacity expansion. Ebitda grew 5.3% y-o-y. However, depreciation rose 17.5% y-o-y following the addition of machinery and test equipment to support the group’s capacity expansion, while the effective tax rate jumped to 10% (against 8% in the nine months of FY17). Overall, FY18 core net profit fell 11% y-o-y to RM39.1 million.
Despite the lower earnings delivery, KESM declared a higher 20% dividend payout in FY18 versus 12% in FY17 in view of minimal capital expenditure (capex) requirements during the year. The group reduced its capex to below RM50 million in FY18 in line with its guidance, compared with RM110 million in FY17. Overall, KESM declared a higher 18.5 sen dividend per share in FY18 against 12.5 sen in FY17. We expect KESM to keep its dividend payout at least 20% in FY19. The group projects higher utilisation from 1QFY19, driven by improving wafer yield on newer chips. Apart from that, it is targeting to grow its non-automotive segment, which contributes 20% to group revenue. We cut our FY19 to FY20 earnings per share estimates by 9% to 13%. We maintain our “hold” rating with a higher TP of RM18.50, still based on 14.4 times price-to-earnings ratio (PER) to its 2020 earnings forecast, a 10% discount to our target sector PER as we roll over our valuations to end-2019. — CGSCIMB Research, Sept 24