Kenanga Research sees earnings recovery for KESM

KUALA LUMPUR: Kenanga Research expects a gradual continuation of earnings recovery in the subsequent quarters on the back of improving car sales for KESM as it maintained an Outperform with a higher target price of RM9.30.

It said on Thursday KESM’s core net profit of RM4.5mil (+98% QoQ; +72% YoY), accounted for 22%/24% of its/consensus’ estimates. The improvement mainly stemmed from better operating efficiencies.

Lower depreciation and raw material expense led to better margins, it said. YoY, revenue dipped 17% due to lower demand for burn-in testing services.

However, core net profit grew 72% to RM4.5mil thanks to: (i) lower depreciation with certain test equipment and machinery fully depreciated, (ii) decline in raw material expense as efforts to optimise its testing lines paid off, and (iii) lower staff cost following a reduction in headcount.

On the outlook, Kenanga Research said the EU market recorded back-to-back increase in passenger car sales for the month of October, advancing 9% YoY. This follows the 14.5% YoY jump in the previous month of September, where Germany was the best performer.

“We believe the growth will continue in tandem with the on-going strive for lower CO2 emission by regulators, pushing car manufacturers to get on board with electric vehicles in order to meet emission targets.

“This will in turn benefit KESM due to higher demand for automotive semiconductor in electric vehicles. Tweaked FY20E CNP higher by 3.4% to RM21.2m on housekeeping, while maintaining a net profit margin of 6.1%.

“We maintain FY21E core net profit of RM24.8mil (+17% YoY) with a net profit margin 6.7% to account for better operational efficiencies and higher margin businesses from the automotive space, ” it said.

Kenanga Research maintain an Outperform with a higher Target Price of RM9.30 (previously RM8.70). It believes KESM will continue to benefit from the rising semiconductor content per vehicle.

However, the risks to its call include: (i) later-than-expected recovery in vehicle sales, (ii) slower-than-expected adoption of new semiconductor modules in automobiles, and (iii) delay in the US-China trade truce which could potentially lengthen the industry recovery process.

Source: TheStar