KESM- a cheap tech stock

Background

KESM is involved in the provision of semiconductor burn-in services, assembly of electronic components & testing of semiconductor integrated circuits. KESM's financial performance tends to mirror that of the semiconductor sector. In line with the expected recovery in the tech sector, I expect KESM's financial performance would improve in the next few quarters.

Recent Financial Results

For QE30/4/2013, KESM's pre-tax profit increased by 47% q-o-q but dropped 17% y-o-y to RM3.1 million while revenue increased 3% both q-o-q & y-o-y to RM60 million. Due to non-deductible expenses, KESM's effective tax rate was higher than the statutory tax rate. This has affected the profit after tax for KESM for the past 1 year (except for QE31/1/02012).


Table: KESM's last 8 quarterly results


Chart 1: KESM's last 34 quarterly results 

Financial Position

KESM's financial position as at 30/4/2013 is deemed satisfactory, with current ratio at 3.6 times & gearing ratio at 0.16 time. KESM's net cash position is strong at RM71 million. This translates to a cash holding of RM1.65 each share.

Valuation

Due to high effective tax rate, KESM incurred a net loss of RM2.1 million for the past 4 quarters (cumulative). Thus, we can't compute KESM's PE. KESM is cheap as its Price to Book of 0.3 time. In fact, the share price is so low, KESM is only valued at the price of the cash in hand. The market is ignoring the other assets of the company as well as its businesses. On the basis, I believe KESM is an attractive stock for long-term investment.

Technical Outlook

KESM's share price is trapped in a large 'symmetrical triangle', with support at RM1.70 & resistance at RM1.90. The share price has violated the RM1.70 in the past few days on very thin volume but the price has since recovered back above the RM1.70 support.


Chart 2: KESM's weekly chart as at Sept 5, 2013_9.30am (Source: Quickcharts)

Conclusion

KESM could be a good stock for long-term investment in line with the expected recovery in the semiconductor sector. It is relatively cheap, trading at a price equivalent to its cash holding.

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.