By Af­fin Hwang Cap­i­tal Rat­ing: Buy Tar­get price: RM21.80

The Star Malaysia - StarBiz - - Analyst Reports -

THE high cap­i­tal ex­pen­di­ture (capex) of KESM in re­cent years and the build-up of its au­to­mo­tive test busi­ness will be sup­port­ive of the com­pany’s un­der­ly­ing growth.

Ac­cord­ing to Af­fin Hwang Cap­i­tal, which re­cently held an in­vestor meet­ing for KESM, the tech­nol­ogy com­pany had guided for a pre­lim­i­nary capex of RM70mil to RM80mil for the fi­nan­cial year (FY) end­ing July 31, 2018.

“We un­der­stand that capex has been al­lo­cated for a com­bi­na­tion of new au­to­mo­tive prod­ucts and ca­pac­ity in­crease of ex­ist­ing prod­ucts,” the bro­ker­age noted.

In FY2017, KESM upped its capex to RM107mil from RM30mil in FY2016.

Af­fin Hwang Cap­i­tal main­tained its “buy” call on KESM for a play on the au­to­mo­tive burn-in and test busi­ness, which the bro­ker­age be­lieved would be un­der­go­ing strong struc­tural growth.

Its un­changed tar­get price of RM21.80 for KESM was based on a val­u­a­tion of 17 times the es­ti­mated earn­ings of KESM for 2018.

“Although man­age­ment did not pro­vide FY2018 es­ti­mated earn­ings guid­ance, we sense a com­fort­able level of op­ti­mism,” Af­fin Hwang Cap­i­tal said.

“We have mod­elled into our fore­cast fairly sta­ble EBITDA (earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion) of 33.7% to 34% over FY2018-2019 es­ti­mates, but they could be con­ser­va­tive if capex con­tin­ued to sur­prise on the up­side,” it pointed out.

KESM’s FY2017 EBITDA mar­gin ex­panded to 33.6% from 32.2% in FY2015 and from 27.4% in FY2010. Es­sen­tially, the mar­gin ex­pan­sion was driven by its move into the test seg­ment and also ac­com­pa­nied by scale.

“None­the­less, man­age­ment con­tin­ued to play down fur­ther mar­gin growth in the near fu­ture although it be­lieves that mar­gins can fur­ther in­crease post a 18 to 24-month time­frame af­ter the com­pany’s con­tin­ued in­vest­ment into fur­ther im­prov­ing its cost ef­fi­ciency,” Af­fin Hwang Cap­i­tal said.

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