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Wednesday, March 11, 2020

KESM 1H results below forecast, Affin Hwang Research says

ANALYST REPORTS
Wednesday, 11 Mar 20209:40 AM MYT

Affin Hwang Capital Research said despite the weaker 1H revenue (-14% year-on-year), KESM reported an 18% yoy increase in core profit.

KUALA LUMPUR: Burn-in tester KESM’s 1H results were below expectations as Affin Hwang Capital Research’s anticipation of a recovery was likely pushed back due to the weak external environment.

Covid-19 is likely to negatively impact earnings while the recent oil crisis could also push back consumption spending on automotive, it said in a research report on Wednesday.

“We cut FY20-22E EPS by 2145% to reflect a delayed recovery but believe that KESM is well positioned to benefit from the next upturn. Its strong net cash position and management also appeal. Maintain Hold with an unchanged 12-month TP of RM8.21, ” it said.

Affin Hwang Capital Research said despite the weaker 1H revenue (-14% year-on-year), KESM reported an 18% yoy increase in core profit.

As profit margins have remained relatively stable (EBITDA margin down -0.2ppts yoy to 27.4%), the earnings improvement has largely been driven by a reduction in depreciation (-17% yoy).

“We understand that most of its older equipment has been fully depreciated while the recent cutback in capex has helped to lower depreciation levels. The 6MFY20 capex only amounted to RM5mil, from RM17mil a year ago.

“Overall, results were nevertheless below our and street expectations, accounting for only 23% and 26% of our FY20 respective estimates.

“The variance against our forecast was largely due to lower-than-expected revenues. We had previously expected the automotive segment to see stronger improvement after several quarters of weakness, ” it said.

Affin Hwang Capital Research said revenue and earnings were weaker quarter-on-quarter (qoq) and likewise profit margins.

Notably, despite the weakness in the sector, the research thinks that KESM is holding up fairly well despite the adversities.

“The company is likely to be well positioned to benefit from the next upturn, although there are likely still to be near-term challenges given the weak external environment.

“We cut FY20-22E EPS by 21-45% to account for the delay in a sector recovery. Management also cited that its China operations have been impacted by the Covid-19 outbreak.

“Despite the earnings cut, our target price is unchanged at RM8.21 after rolling forward our valuation horizon to FY21 from CY20 previously, but based on the same target PE multiple of 14 times, ” it said.

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