KESM: Earnings Still Holding Up Well

Results Update

For QE30/4/2016, KESM's net profit rose by 8% q-o-q or 337% y-o-y to RM7.6 million while revenue was unchanged q-o-q but rose 13% y-o-y to RM71 million. Profit before tax rose q-o-q mainly due to higher net revenue (increased by  RM2.0  million) and lower exchange loss (by RM0.4 million) offset by increased employee benefits expense (by RM1.1 million).


Table: KESM's last 8 quarterly results

The last 4 quarters have been fairly good for KESM. Its net profit was near its high of RM7-10 million per quarter. The only other period when it did as well was in QE31/1/2008 & QE31/7/2007. In QE31/1/2008, it recorded an exceptional high net profit of RM15 million as it wrote back deferred tax provision amounting to RM16.95 million on obtaining satisfactory agreement on Reinvestment Allowance claims. It is fair to say that KESM could well be at its peak earning.


Chart 1: KESM's last 45 quarterly results 

If you look at KESM's profits for the past 45 quarters, you will see that KESM expended RM493 million on capex in order to made net profits totaling RM160 million. Due to high depreciation totaling RM527 million, fixed assets only rose from RM112 million to RM161 million (Note: No attempt is made to reconcile the numbers). The low profits explained why the company's returns on assets & equity are so abysmal, except for periods of peak demand (like 2007/2008 and probably today).


Table 2: KESM's last 10 years' Capex, Depreciation, Net Profit, ROE & ROA


Chart 2: KESM's last 10 years' Capex, Depreciation, Net Profit, ROE & ROA

Industrial Outlook

KESM is dependent on the semiconductor sector, which is expected to be weaker in 2016 due to weak demand for PCs (here). World Semiconductor Trade Statistics (WSTS) reported that global semiconductor sales fell 6.2% y-o-y in April 2016 from US$27.6bil to US$25.8bil. It forecast a global sales for 2016 of US$327.2bil, down 2.4% from 2015. (here). The weaker demand is reflected in the Philadelphia Semiconductor Index (SOX) below.


Chart 3: SOX's monthly chart as at Jau 13, 2016 (Source: Yahoo Finance)

Valuation

KESM (closed at RM5.04 yesterday) is now trading at a PE of 6.5 times (based on last 4 quarters' EPS of 77 sen). If KESM is enjoying peak earning today, then its forward earning could normalize substantially. Based on historical earning of about  20-30 sen, KESM's forward PER could be 16-25 times.

Technical Outlook

KESM is still in a long-term uptrend- guided by its 21-month SMA line. Its latest quarterly result seems to have spur the share price to revisit its January high.


Chart 4: KESM's monthly chart as at Jun 15, 2016 (Source: ShareInvestor.com)

The weekly chart shows immediate resistance at RM5.40.


Chart 5: KESM's weekly chart as at Jun 15, 2016 (Source: ShareInvestor.com)

Conclusion

Based on anticipated poorer financial performance, I would maintain my rating for KESM as a SELL ON STRENGTH.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, KESM.