PETALING JAYA: KESM Industries Bhd is expected to return to profitability in financial year 2022 (FY22) as the automotive semiconductor supply chain situation improves.

       It also expects minimal operation disruption as it has achieved a vaccination rate of over 90% for its staff to-date.

       The group is also confident that demand for burn-in and test services for automotive chips going into infotainment, powertrain and advanced driving system applications will continue to rise, driven by higher electronics content value growth in automotive, said CGS-CIMB in a report.

       KESM reported a net profit of RM7.3mil for FY21 compared to RM96,000 a year ago. However, it slipped back into the red in the fourth quarter (Q4) of FY21 with a net loss of RM654,000 compared with a net profit of RM894,000 in Q3 of FY21 as it continued to see weak volumes for its burn-in, testing and electronic manufacturing services.

       Kenanga Research said KESM’s utilisation rate for the period in review dipped below 30% due to the sporadic relaxation or tightening of the movement control order.

       It also expects a very gradual recovery for KESM instead of an exuberant one seen in other companies. “Over the longer term, the group remains optimistic that it will benefit from the automotive semiconductor boom as it is expected to be a multi-year growth trend,’’ Kenanga added.

       Kenanga said KESM continued to exhibit lagging performance compared to its automotive peers which have reported stellar earnings, in tandem with the surge in demand for automotive semiconductor components. It believes this is due to the fact that KESM is likely involved in less important automotive chips.

       CGS-CIMB has raised its FY22-FY23 forecast earnings per share (EPS) by 4% to 9%.

       It has retained a “hold” recommendation on the stock, with a higher target price of RM12.20 a share.

       Kenanga, meanwhile, reduced its FY22 core net profit forecast by 24% to RM14mil and introduced FY23 core net profit of RM21mil. It has a “market perform’’ call on the stock with a lower target price of RM11.40 a share from RM12.00 previously.

       That is based on the current year 2022 price earnings ratio of 27.8 times, at a three-year mean.

       Risks to its call include a faster-than-expected ramp-up in volume for burn-in and test services, faster-than-expected adoption of new semiconductor modules in automobiles and a sudden surge in customer’s forecast.

       CGS-CIMB added that it foresees faster-than-expected inventory replenishment in the automotive semiconductor market as a key upside risk.