KUALA LUMPUR: KESM Industries Bhd's first quarter ended Oct 31, 2023 (1Q24) results met Kenanga Research's expectations, marking its second consecutive quarterly profit, driven by higher loading volume from its burn-in and test services.
The research firm said these could be early signs that its RM143 million investment is gradually paying off.
"KESM's 1QFY24 core net profit of RM0.9 million versus net loss of RM1.5m in 1Q23 made up 34 per cent of both our full-year forecast and the full-year consensus estimate.
"We consider the results within expectations given the volatility in its quarterly earnings," it said in a note.
On a year-on-year (YoY) basis, KESM's 1Q24 revenue increased 20.4 per cent on improved loading volume for its burn-in and test services.
Kenanga Research believes that there has been gradual production ramp-up from its new equipment with a price tag of RM143 million over the past quarters.
On a quarter-on-quarter (QoQ) basis, the company's 1Q24 revenue inched up three per cent while its core net profit almost doubled (albeit from a low base) as its plant utilisation improved.
This was KESM's second consecutive quarterly profit, indicating that quarterly earnings momentum had extended from 4Q23.
On that note, Kenanga Research mentioned that, while the sustained earnings are encouraging and signal positive traction for the new investment, caution still persists.
"The reported earnings remained tepid in absolute terms, and the group had historically exhibited higher earnings volatility compared to its peers.
"We believe it would be prudent to keep a close eye on the next few quarterly earnings, more so during its transition to new chips for electric vehicles (EVs)," it added.
Kenanga Research has maintained its forecasts for KESM, with a "Market Perform" call and a target price of RM7.06.
The firm said it likes KESM for its exposure to the promising automotive semiconductors space, being one of the largest independent burn-in and test service providers in Malaysia potentially benefiting from multinational corporations (MNCs) expansions in the country, and its physical presence in China to ride on the government's ambitious plans for their semiconductor industry.
However, it remains cautious for the immediate term as the group still faces the potential risk of sub-optimal loading volume during the transitionary period.
Moving forward, Kenanga Research said risks to its call include slower-than-expected ramp-up in volume for burn-in and test services, slower-than-expected adoption of new semiconductor modules in automobiles, and sudden decline in customer forecast.