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