PETALING JAYA: KESM Industries Bhd is committed to expanding its production capacity to assist customers meet the supply-demand imbalance.

       However, there is skepticism about its move given that KESM is already running at low utilisation levels and that further capacity increaes could lead to lower blended average selling prices, exacerbating struggles to fill excess capacity over the near term.

       Based on that and its recent financial results, CGS-CIMB Securities said a report that it has cut its financial year (FY) 2022 to 2024 earnings per share for the company by 24% to 52%, and citing lower utilisation, something borne of the ongoing supply chain disruptions.

       CGS-CIMB said the group estimates that the recent lockdowns in key manufacturing cities and ports in China will likely compound the effect of an already disrupted global supply chain.

       KESM is an independent burn-in and test, and electronics manufacturing service provider, mainly for the automotive semiconductor industry.

       The report kept the group’s “hold’’ rating on the stock of the company with a reduced target price of RM7.80 a share.

       It pegs its valuation at 0.9 times current year 2023 price to book value (versus 1 time previously) to reflect the weaker tech sector sentiment.

       “This is in view of weaker near term earnings prospects and the sluggish sentiment in the tech sector amid a rising interest rate environment and a prolonged Russia-Ukraine war,” it said.

       The group’s third quarter FY22 (3QFY22) revenue fell 10% quarter-on-quarter (q-o-q) to RM58.2mil due to lower sales volumes across both the electronic manufacturing services (EMS) and burn-in and test segments.

       The house estimates that the group’s utilisation rate would have fallen below 30% in 3QFY22.

       It said raw materials cost and depreciation expenses slid 20% and 10% q-o-q, respectively.

       Revenue in the nine months of FY22 grew 0.5% year-on-year, mainly led to higher burn-in and test services but this was partially offset by lower sales from the EMS segment.

       CGS-CIMB said the faster-than-expected inventory replenishment in the automotive semiconductor market and higher contribution from the semiconductor burn-in and testing segment as potential catalysts for the stock.

       However, softening global automotive demand and prolonged supply chain disruptions due to the Covid-19 pandemic are downside risks.