KESM INDUSTRIES BHD

By Affin Hwang Capital Buy (maintained) Target price: RM21.80

KESM Industries Bhd’s FY17 core net profit grew by 40% year-on-year (y-o-y) and was above expectations, due to lower effective tax rate.

Nevertheless, Affin Hwang Capital said KESM’s growth momentum remained on an upward trajectory as the company recorded its 11th consecutive quarter of revenue growth, underpinned by structural growth in the automative segment.

To elaborate, KESM’s FY17 earnings before interest, tax, depreciation and amortisation (EBITDA) margin at 33.6% came in slightly above Affin Hwang’s forecast of 33%. This is probably due to a higher degree of testing work undertaken.

“At the core profit level, FY17 earnings were 12% above our forecast.

“This was however due to a negative tax charge in fourth quarter of 2017 (4Q17) and hence a lower than expected FY17 effective tax rate of 8% versus 15.3% in FY16.

“We suspect this could be due to investment tax allowance following

KESM’s aggressive capital expenditure plan (RM107mil in FY17, which is nearly equivalent to its Ebitda for the year),” said Affin Hwang.

Dividend per share (DPS) for the quarter amounted to 6 sen bringing FY17 DPS to 12.5 sen (FY16 was 7.5 sen) which was above our expectation of 8.5 sen.

Affin Hwang left its forecasts unchanged, stating that slight changes to the forecasts take into account minor adjustments post results.

“We keep our ‘buy’ rating on KESm for its existing growth prospects underpinned by the strong structural growth in the automative segment,” Affin Hwang added.

Key downside risks include loss of customers and reduction in outsourcing opportunities as customers increase their in-house burn-in and test functions.