KESM INDUSTRIES BHD

By Kenanga Research Outperform (maintained) Target price: RM17.60

KENANGA Research is sanguine on the prospects of KESM Industries Bhd, primarily driven by the marked acceleration of the company’s capital expenditure (capex) and faster-than-expected ramp-up of new testing equipments.

The research unit indicated that its prior estimates on KESM are overly conservative, following the latest positive developments of the company.

KESM which is the world’s largest independent burn-in and test service provider, is poised to achieve a record year on capital investment spend for the financial year of 2017 (FY17), after delayed roll-outs from its clients led to a slowdown in expansion plans last year.

“The quarterly statements for the first nine months of 2017 (9M17) reflected RM81.2mil in capex which is already more than double the entire FY16 capex of RM30mil and exceeds our full-year expectation of RM75mil.

“We understand from the management that the current pace in capex is likely to continue into the immediate quarters ahead, with focus on the addition of testing equipment for automotive semiconductors and the balance for upgrading and maintenance of existing machineries,” said Kenanga Research.

Recall, KESM posted a strong set of 9M17 results with revenue growing 17.5% year-onyear (y-o-y) to RM248.2mil and net profit jumping by 35.1% y-o-y to RM30.6mil. The strong top-line results were on the back of capital investments in prior quarters which allowed the company to capitalise on the higher demand for burn-in and testing services.

Kenanga Research has amended its net profit projections for KESM, underpinned by the increase in its capex assumption and the higher utilisation rate of existing machineries.

“We have upgraded our net profit growth projections for FY17 and FY18 to 33% and 16.4% respectively. This is in contrast to the earlier forecasts of 26.5% and 14.1% in FY17 and FY18.

“We continue to like KESM and believe the company is uniquely positioned to benefit from two salient trends namely rising car production by global automakers and the increased chip content within vehicles,” said the research house.

Kenanga Research maintained its “outperform” call on the independent burn-in and test service provider, but raised the target price to RM17.60 from RM15.20 previously.