KESM likely to gain from improving auto chip market next year
PETALING JAYA: Analysts are taking a cautious stance on KESM Industries Bhd after its net loss widened in the fourth quarter ended July 31, 2022 (4Q22).
However, not all is doom and gloom for the group as demand and growth in the automotive semiconductor market is expected to improve by next year in tandem with the higher burn-in and testing services demand for automotive chips.
KESM is the largest independent burn-in and test service provider in Malaysia, serving the world’s leading semiconductor manufacturers.
CGS-CIMB Research said it is cautiously optimistic for KESM to return to profitability in 4Q23 in view of the improving automotive semiconductor supply chain situation in calendar year 2023.
“Moreover, the group remains confident that demand for burn-in and test services for automotive chips going into infotainment, powertrain and advanced driving systems will continue to rise, driven by the automotive industry’s transition into electric vehicles and autonomous vehicles.
“We see sustainable demand growth in the automotive semiconductor market and higher burn-in and testing services demand for automotive chips as upside risks to our “hold”call, while softening global automotive demand due to risk of economic recession and prolonged supply chain disruptions due to the Covid-19 pandemic are key downside risks,” it added.
KESM posted a net loss of Rm2.5mil, or loss per share of 5.82 sen in 4Q22 from a net loss of RM654,000, or 1.52 sen a year prior.
Its revenue fell 4.1% to Rm55.66mil against Rm58.05mil in the same quarter last year.
Notwithstanding this, the group proposed a final dividend of six sen per share, to be approved at its AGM. This is in addition to the group’s interim dividend of 1.5 sen per share paid on August 23.
Kenanga Research said while the supply shortage situation for global automotive semiconductor would likely remain throughout 2022 and possibly continue into 2023, it said KESM might struggle to fully capitalise on the market demand given that most of its automotive product portfolio consists of legacy chips.
“While the group is transitioning into newer products, this is expected to be a gradual process over the next two to three quarters. Making things worse, the group may likely need to maintain its workforce during the transition period to prevent the risk of retraining new workers in a rising wage environment.
The research house, which is maintaining its “market perform” call with a lower target price of RM7.47, said it was reducing its 2023 forecast core net profit (CNP) by 65% as it factors in the longer-than-expected transition period and introduce 2024 forecast CNP of of Rm6.1mil.