KESM: Earnings Rose Srquentially

Results Update

For QE31/7/2016, KESM's net profit rose by 6% q-o-q but dropped 23% y-o-y to RM8.0 million while revenue rose 5% q-o-q or 8% y-o-y to RM74.5 million. Revenue rose y-o-y due to higher demand for burn-in and test services. Despite the increased revenue, Profit before tax dropped y-o-y due to the drop in Other incomes as a result of the absence of an exchange gain of RM1.1 million and absence of reversal of sundry payables of RM0.7 million; increase in employee benefits expense RM4.2 million as a result of higher wage rates and staff compensation to support increased revenue, which had more than offset the decline in raw  materials and consumables used and changes in work-in-progress of RM2.0 million as a result of lower sales from electronic manufacturing services.


Table 1: KESM's last 8 quarterly results


Chart 1: KESM's last 46 quarterly results 

As mentioned in the previous post, KESM's profit is extremely small compared to its capex. For the past 11 years, it expended RM509 million on capex in order to made net profits totaling RM168 million. Due to high depreciation totaling RM538 million, fixed assets only rose from RM112 million to RM169 million (Note: While I did not attempt to reconcile the numbers, the rough figures seem to tally). 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 11 years' Capex, Depreciation, Net Profit, ROE & ROA


Chart 2: KESM's last 11 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.  However, KESM is now focusing on the chips for the automotive sector. Kenanga had issued a report in early August which highlighted this new area of growth. To wit:

KESM is well positioned to benefit from two salient trends; (1) rising global automotive sales (expected to exceed 100m units in 2017 from 91m in 2015), and (2) increased electronic chips content in cars. The value content of electronics in a car is expected to grow from USD284 to USD330 from 2014 to 2019. The automotive segment represents an area of high growth potential and has enabled the Group to diversify into a segment that offers longer product life cycle and higher margin.

The new demand for automotive chips could be the driving force that propelled the Philadelphia Semiconductor Index (SOX) to break into a new high in late July.


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

Valuation

KESM (closed at RM8.00 yesterday) is now trading at a PE of 11.2 times (based on last 4 quarters' EPS of 71.40 sen). At this PER, we would in the past consider the stock to be fully valued. The big question is whether KESM - like any other stocks in or servicing the semiconductor sector - is now in peak earning. If it is, then there is a good chance that forward earning will drop. However, the automotive sector demand for chip could be something structural, which may extend the earning growth for a while. In the August report, Kenanga valued KESM at RM7.90.

Technical Outlook

KESM is now trading at all-time high. As we have seen in 2000, the steep rise in price is a set-up for a steep correction. Thus we have to be careful trading or investing in KESM.


Chart 4: KESM's monthly chart as at Sep 20, 2016 (Source: ShareInvestor.com)

The weekly chart shows immediate support is at the January 2016 high of RM6.00.


Chart 5: KESM's weekly chart as at Sep 20, 2016 (Source: ShareInvestor.com)

Conclusion

Based on good financial performance & exciting prospect, I consider KESM to be a good stock for long-term investment. However, I believe KESM is good for some profit-taking due to its sharp price run-up.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.