KESM Industries Berhad Reports Strong Turnaround and Higher Demand in Q2 FY2026

Key Highlights for Investors

• Return to Profitability: KESM Industries Berhad posted a profit before tax of RM4.14 million for the second quarter ended 31 January 2026, a significant turnaround from a loss of RM3.08 million in the same quarter last year. For the first half of FY2026, profit before tax was RM6.66 million, compared to a loss of RM8.08 million in the prior year.
• Revenue Growth: Quarterly revenue rose 7% year-on-year to RM54.9 million, while revenue for the first half climbed 4% to RM107.95 million, driven by increased demand—particularly for services related to artificial intelligence (AI) chips.
• Cost Management: The company successfully reduced employee benefits expenses, other operating expenses, and finance costs, further supporting the bottom line.
• Cash Flow and Financial Position: Strong operating cash flow of RM28.6 million was reported for the first half, with cash and short-term deposits standing at RM195 million. However, cash balances decreased 7% due to capital expenditure and loan repayments.
• Dividend: An interim tax-exempt dividend of 6.0 sen per share (total payout: RM2.58 million) was paid, down from 7.5 sen last year.
• Strategic Investments: Significant capital expenditure of RM34.9 million in property, plant, and equipment, underpinning future growth. Commitments for further PPE purchases stand at RM10.6 million.
• AI Market Exposure: Management highlighted robust demand for AI-related semiconductor services, a key driver behind revenue improvements. AI semiconductors are projected to account for an even larger share of global semiconductor revenues in 2026.

Detailed Financial Performance

Profit and Loss

• Net profit after tax for Q2 FY2026: RM3.59 million vs. net loss of RM2.99 million in Q2 FY2025.
• Basic earnings per share: 8.3 sen for the quarter, 12.6 sen year-to-date (vs. loss per share of 7.0 sen and 17.5 sen prior year).
• Other income: Increased sharply due to a RM2.3 million gain on disposal of property, plant, and equipment, and a RM0.8 million net fair value gain on investment securities.
• Expenses: Consumables rose 29% to support higher sales; depreciation increased 9% as new machinery was commissioned; employee benefits fell 1% due to reduced labor costs; other expenses fell 14% on lower utilities, reversal of impairment, and no fair value loss on securities.
• Finance Costs: Dropped 46% as a result of bank loan repayments.

Balance Sheet and Cash Flow

• Property, Plant, and Equipment: Up 7% to RM143.6 million due to RM34.8 million net additions.
• Receivables: Increased 14% to RM50.1 million, mainly from disposal proceeds and higher sales.
• Prepayments: Jumped to RM7.0 million, reflecting higher downpayments for machinery and test equipment.
• Investment Securities: Rose 13% to RM12 million, reflecting net fair value gains.
• Cash and Short-term Deposits: Lower at RM195 million, net of outflows for investments and loan repayments.
• Total loans and borrowings: Reduced by 15% to RM30.7 million, primarily due to net repayments.
• Trade and Other Payables: Increased 17% due to higher payables for equipment purchases and deferred grant income.

Operations and Market Prospects

• No Material Litigation or Corporate Proposals: The company reported no pending legal issues or uncompleted corporate proposals.
• AI-driven Growth: The company expects continued strong demand for AI applications, especially in data centers. AI semiconductors are now nearly one-third of industry revenue, with an upward trend projected for 2026.
• Global Supply Chain Risks: Management flagged potential volatility from recent U.S. tariff adjustments and ongoing geopolitical tensions, including the impact of war in Iran on energy prices.

Related Party and Capital Commitments

• Related Party Transactions: Management fees of RM5.0 million paid to the holding company, Sunright Limited (and its subsidiaries), and RM1.25 million in dividends paid to the holding company. Purchases from related companies totaled RM4.6 million.
• Capital Commitments: RM10.6 million committed for PPE purchases, of which RM2.95 million relates to purchases from related companies.

Taxation

• Tax expense: RM0.56 million for Q2 FY2026, compared to a tax credit of RM0.09 million in Q2 FY2025. Effective tax rates are lower than statutory due to non-taxable income and real property gains tax, partially offset by unrecognised deferred tax assets.

Key Takeaways for Shareholders

• Return to Profitability: The marked turnaround in profitability and strong cash generation are positive signals for shareholders and may support higher share valuations.
• AI Exposure: The company’s positioning in the AI semiconductor supply chain is a strong growth driver and a potential catalyst for future share price appreciation.
• Significant CAPEX: High levels of strategic investment in machinery and test equipment underline management’s confidence in future demand but will require ongoing monitoring for returns.
• Dividend Policy: The interim dividend was reduced, possibly reflecting a balance between rewarding shareholders and funding growth.
• Risks: Investors should be mindful of global macroeconomic and supply chain uncertainties, which the company has highlighted.

Potential Share Price Sensitivities

• Positive: Strong earnings recovery, robust demand for AI-related services, and prudent cost management could support further share price gains.
• Negative: Any adverse developments in global trade policies, supply chain disruptions, or escalating geopolitical tensions could impact operations and investor sentiment.
• Dividend Trend: The reduction in interim dividend may be viewed negatively by income-focused investors, though it may be strategic given the capital investment cycle.

Disclaimer: This article is for informational purposes only and does not constitute investment advice or an offer to buy or sell securities. Investors should conduct their own research and consult with financial advisors before making investment decisions. The author and publisher are not responsible for any losses resulting from investment decisions based on this article.

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