Results Review

• Chin Well Holdings Bhd’s 3QFY18 net profit plunged 41.7% Y.o.Y to RM8.6 mln, from RM14.7 mln in the previous corresponding period, mainly owing to increased raw material cost, softer export sales and higher administrative expenses. Revenue, on the other hand, grew marginally to RM160.5 mln (+1.5% Y.o.Y), boosted by stronger performance of the wire rod division.

• Cumulative 9MFY18 earnings also fell 9.2% Y.o.Y to RM37.9 mln, from RM41.7 mln in 9MFY17, dragged down by weaker margins in-tandem with rising raw materials prices, higher unrealised forex losses and higher administrative expenses. Revenue, however, grew 16.1% Y.o.Y to RM441.2 mln, compared to RM380.2 mln in 9MFY18.

• The group’s earnings came in below our expectations, accounting to 59.9% of our previous full year estimated net profit of RM63.2 mln, although revenue was broadly in-line with our forecast at about 71.9% of full-year revenue of RM613.7 mln. The variance was mainly attributed to lower-than-expected fasteners sales, hit by the strengthening of the Ringgit and sub-par EBITDA margins from the wire segment on higher raw materials cost.

• The group has been in a net cash position for the last five years with a cash pile of RM100.9 mln. Meanwhile, future earnings growth will be driven by stronger turnover amid rising U.S. Dollars and higher utilisation rate, coupled with the recovery of its margins. Hence, Chin Well is expected to growth at a five-year net profit and revenue CAGR of 11.4% and 6.5% respectively.

Prospects

In 3QFY18, Chin Well’s wire rod turnover outperformed our expectations, largely due to the delivery of chicken mesh orders to a key client based in Kedah. We expect the positive growth to spillover to FY19, albeit at a slower pace and allowing for stronger utilisation rate (about 75.0%-80.0%) from rising demand for downstream wire rod products. Despite the strong revenue growth, we forecast thinner margins amid inflated input costs (Appendix 1) and the additional cost arising from safeguard duties on the previously imported wire rod.

We also lowered our FY18 fasteners sales, which was hit by the stronger Ringgit, although we think that the situation will improve come FY19, underpinned by robust demand for fasteners in-line with the recovery in Europe’s economic growth and continuous development efforts in many developing countries. We also project a pullback in the Ringgit on the back of a potential slowdown in Malaysia’s economic growth, coupled with rising U.S. interest rates. Higher production costs in China amid more stringent environmental regulations is also expected to level the playing field for most Asian fasteners makers, which is likely to support margins. Downside risks include volatile wire rod prices which will impact turnover on the back of rising trade protectionism.

Valuation and Recommendation

Consequently, we trim our FY18 earnings and revenue forecast lower by 20.0%/4.2% to RM50.6 mln and RM588.0 mln respectively. The revision was driven by lower fasteners revenue on the back of the Ringgit’s strength over the 9MFY18 period as well as the thinner-than-expected margins on the wire rod division. Meanwhile, FY19 net profit and revenue are also reduced slightly by 4.8% and 2.0% to RM61.6 mln and RM664.1 mln respectively as we tweaked our assumptions.

However, we maintain our BUY recommendation on Chin Well with a lower target price of RM1.85 (from RM1.90 previously), in-tandem with the revised earnings. Our target price is arrived by ascribing an unchanged target PER of 9.0x to its FY19 EPS of 20.6 sen. We maintain our Buy recommendation as we believe demand for fasteners will remain firm in FY19 as the European economy continues to recover. The target PER is at a small premium to PER of its closest peer, Tong Herr Resources Bhd premised on Chin Well’s higher margins and the positive growth outlook in the fasteners landscape in Europe.

Source: Mplus Research - 25 May 2018