• Chin Well Holdings Bhd’s 4QFY18 net profit jumped 96.4% Y.o.Y to RM18.0 mln, from RM9.2 mln in the same quarter last year, due to increased ASPs, lower administrative, selling and distribution expenses, coupled with improved turnover contribution. Revenue for the quarter rose 6.3% Y.o.Y to RM150.0 mln, from RM141.1 mln in 4QFY17. The group has also declared a second interim dividend of 4.1 sen per share (from 3.3 sen per share in FY17), payable on 27th September 2018.

• Full-year net profit, meanwhile, rose 9.8% Y.o.Y to RM55.9 mln, from RM50.9 mln previously, on improved sales, albeit capped by weaker margins seen in the wire products segment due to sharp increases in raw materials prices and a forex loss of about RM0.2 mln (vs. FY17 forex gain: RM6.1 mln). Revenue, meanwhile, improved to RM591.3 mln (+13.4% Y.o.Y), from RM521.3 mln last year.

• Chin Well’s reported earnings were above our expectations, some 10.0% higher than our full-year estimated net profit of RM50.6 mln, although revenue met our forecast at about 100.6% of full-year revenue forecast of RM588.0 mln. The difference was mainly due to lower-than-expected depreciation and net interest expenses.

• Future earnings growth will be underpinned by stronger turnover amid higher ASPs, stronger Greenback, ongoing cost efficiency initiatives and higher utilisation rate. All in-all, the group is still expected to growth at a five-year net profit and revenue CAGR of 11.4% and 6.5% respectively. The group has also been in a net cash position for the last five years with a cash pile of RM117.7 mln.

Prospects

After hitting its peak at in November 2017, wire rod prices has since normalised around US$670.0 -US$690.0 per metric tonne from April –July 2018. Even so, wire rod prices remained higher at an average of US$677.5 per metric tonne YTD, compared to US$562.2 in the previous corresponding period. Moving forward, we are mindful of potentially higher wire rod prices as China resumes its winter production cuts from October to March next year. Consequently, rising raw materials prices, in-addition to higher business costs (i.e.: gas tariffs, labour costs) could limit earnings growth as Chin Well struggles to pass-on the additional costs amid the tight competition.

Moving forward, the group is looking to ramp up the capacity of its DIY fasteners, reinforcing bar (or rebar) connectors and wire mesh products which collectively contributes about 11.0% to the group’s revenue currently, to 30.0% – 40.0% in four to five years’ time. The group has also earmarked about RM15.0 mln to upgrade its galvanizing wire production line, which will improved production output and reduce cost per unit.

In the long-run, the group foresees potential for the South Asia, South-East Asia and the U.S. becoming its key markets for earnings growth. Chin Well also expects increased wire mesh sales turnover – contributed by potentially large orders from the Middle East and South Asia region in FY19. Consequently, the group also wants to increase the production of new wire mesh products that could be used in the agriculture and infrastructure sectors.

Despite slowing demand from the U.S. from two years back, the group expects increased orders from the U.S. market in 2019, mainly on the DIY segment. Worldwide industrial fastener demand is expected to grow at a CAGR of 5.4% to US$116.5 bln by 2022, from US$84.9 bln in 2016, underpinned by positive demand from end-use industries and solid recovery in the construction and automotive segments in developed countries. (Zion Market Research)

Valuation and Recommendation

Despite the better earnings performance, we keep our FY19 forecasts unchanged as we believe that the group’s stronger prospects have been reflected in our forecast. As such, FY19 net profit and revenue will remain at RM61.6 mln and RM664.1 mln respectively until we see concrete evidence of margin expansion, which remain pressured by high wire rod prices. We also introduce our FY20 estimated net profit and revenue at RM65.0 mln and RM712.0 mln.

Consequently, we maintain our BUY recommendation on Chin Well with an unchanged target price of RM1.85 by ascribing an unchanged target PER of 9.0x to its FY19 EPS of 20.6 sen (unchanged), as we are positive on Chin Well’s long-term earnings accretion from stronger revenue contributions and U.S. Dollars, coupled with resilient demand for its wire rod products and fuller production utilisation. The target PER is at a small premium to the valuation 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 - 28 Aug 2018