Kim Hin Industry - The Going Remains Challenging

Date: 28/11/2018

Source  :  RHB-OSK
Stock  :  KIMHIN       Price Target  :  0.95      |      Price Call  :  SELL
        Last Price  :  1.08      |      Upside/Downside  :  -0.13 (12.04%)

Maintain SELL with a new MYR0.95 TP from MYR1, with expected total return of -29%. While 9M18 revenue met 71% of our estimates, the combination of lower gross margins, still high operating costs, and a higher effective tax rate pushed bottomline to a MYR20m net loss. This was deeper than our full-year estimate of MYR14m. Looking ahead, the operating environment – both domestic and overseas – is not expected to improve anytime soon. Conversely, management’s focus on protecting Kim Hin’s financial position is clearly reflected by its positive operating cash flow and net cash balance sheet. Post results, we cut our earnings estimates further and now expect the company to still record losses in FY19. The valuation multiple is unchanged at 0.28x, which is -2SD over its 10-year mean on FY19F BVPS of MYR3.40.

Soft figures, still weak numbers. Kim Hin Industry’s 9M18 revenue declined 3% to MYR302m. This was primarily due to weaker overseas sales (dipped c.6% to MYR163m), while domestic sales were flat at MYR140m. Kim Hin’s Australian operations – for which we placed relatively high expectations on – saw sales declining 3.5% to MYR116m due to slower property market activities there. The bottomline for the same period dipped to a net loss of MYR20m due to the combination of lower margins (9M18 GPM: 28.3% vs 9M17 GPM: 33.3%), higher operating costs (sales & administrative and other expenses upped 2% to MYR101m), an unfavourable FX rate (AUD/MYR 9M18: 3.02, 9M17: 3.33), and a higher effective tax rate. The latter was due to losses at certain subsidiaries, which could not be offset against profits made by other units. QoQ, revenue improved 9% to MYR106m, as most geographical segments reported improvements. The exception was Kim Hin’s Australia operations, which saw a marginal 2% decline to MYR38m. Gross margins were 81bps lower at 26.7%. Consequently gross profit improved 6% to MYR28.4m. A higher effective tax rate pushed net losses wider by 89% to MYR9.6m.

Forecasts cut. Given that 9M18 results were below our previous full-year estimates – coupled with the fact that the operating environment is not seeing signs of turning for the better – we lower our FY18F-20F earnings 78%, 548%, and 8%. We do not expect Kim Hin to return to profitability until FY20.

Maintain SELL with a new MYR0.95 from MYR1. We continue to value the stock at 0.28x, which is -2SD over its 10-year mean on FY19F BVPS of MYR3.40. Key risks include a prolonged decline in demand for tiles, rising competition, and unfavourable FX movements.

Source: RHB Securities Research - 28 Nov 2018

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