Sales from EMS segment in FY08 plunged 49.5% to S$42.7m while OEM segment declined 12.8% to S$16.2m. The steep drop in EMS sales was mainly due to sharp decline from its principal customer. The gross profit margin (“GPM”) declined 6.6ppt to 8.3% in FY08, unexpectedly lower than our estimate of 14.4%. The margin contraction was mainly due to lower utilization and incremental factory headcounts.

Despite sharp decline in sales, the operating expenses remained relatively inflated, leading to negative operating profit (“EBIT”). As such, Kinergy incurred a hefty loss of S$5.8m in FY08, as compared to the profit of S$4.5m in FY08.

Net fixed assets (“PPE”) increased by S$1.8m to S$13.6m while total current assets declined S$20.2m to S$34.8m in FY08 due mainly to lower inventories and trade receivables. Bank borrowing has gone up by S$2.2m to S$8.7m whereas cash level slid from S$10.9m in FY07 to S$5.2m.

loss in 2H08 was S$0.6m, compared to a profit of $5.5m in 1H08. The operating costs were not well contained in 2H08, posting an increase of 18.2%.

Trim GPM by 4-5ppt in FY09-10 as overcapacity is expected to prolong due to sagging demand for semiconductor equipment.

Downgrade to SELL recommendation with price target of $0.08: Kinergy is operating under a trying business environment in which business risk is increasingly higher. The precipitous decline in sales during 2H08 was startling and worrisome. The economic data is troubling, showing little sign of economic recovery. The degree of operating leverage and financing leverage has increased as the firm increased its bank borrowings and capital expenditure in FY08 amid a deepening recession. On top of that, the ongoing consolidation in the semiconductor industry is expected to further weaken the demand for semiconductor equipment, on which Kinergy is heavily dependent for its main source of income. With that, we prefer to be conservative on valuation front, continue to peg at 0.4x NTA per share FY09. As such we derive a target price of S$0.080, representing down side potential of 27.3%.