Results Review

• Chin Well Holdings Bhd’s 2QFY19 net profit inched 2.0% Y.o.Y higher to RM15.7 mln, compared to RM15.4 mln previously, in-tandem with the increase in revenue to RM165.1 mln (+2.9% Y.o.Y), from RM160.5 mln in 2QFY18. The group has also declared a single tier dividend of 4.5 sen per share (2QFY18: 3.9 sen), payable on 21st May 2019.

• Consequently, cumulative 1HFY19 net profit also gained 14.6% Y.o.Y to RM33.6 mln vs. RM29.3 mln in the previous corresponding period, while revenue rose 14.4% Y.o.Y to RM341.5 mln, from RM298.5 mln in 1HFY18.

• Segmentally, net profit from the wire rod division fell to RM0.9 mln (-31.2%), from RM1.3 mln previously, dragged down by higher wire rod prices, while the fasteners division improved marginally to RM14.7 mln (+2.6%), in-line with revenue growth.

• The reported net profit and revenue were within our forecast, accounting to 54.2% and 51.4% of our full year estimates of RM62.0 mln and RM664.1 mln respectively. With that in mind, we only made minor adjustments in our forecast FY19 and FY20 net profit to RM63.6 mln (+2.6%) and RM69.5 mln (+6.4%) respectively, after imputing higher margins for the wire rod division as well as increased net interest expense.

• Overall, group net profit and revenue is expected to grow at a healthy five-year CAGR of 11.3% and 7.1% to RM69.5 mln and RM707.4 mln respectively.

Prospects

Moving forward, the group is planning to expand its operations to include warehousing business that provides one-stop warehousing services to its customers. We view the new business as a potential source of recurring income which will also increase Chin Well’s value-added services, albeit contributions is expected to be marginal at this point.

Meanwhile, fasteners sales in Europe remained weak as DIY retailers avoid bulk purchases in anticipation of lower fastener prices, following increased competition from Chinese manufacturers as the latter benefits from increased export tax rebates from their government. However, we expect higher contributions from the U.S., despite soft housing market outlook as DIY retailers seek out non China-based suppliers to lower supply risks amid ongoing trade tensions between the U.S. and China.

Lastly, higher sales volume and margins from the wire rod division is also expected to drive earnings growth, in-tandem with the completion of its wire line upgrades in 2019. We note that group’s gearing has increased slightly to 14.6%, from 13.5% in FY18 as the group increases its loan drawdown to finance the purchase of raw materials, possibly to take advantage of lower prices when the wire rod prices dipped in November 2018. Even so, Chin Well’s balance sheet remains healthy while it continues to be in a net cash position.

Valuation and Recommendation

We maintain our recommendation on Chin Well at a BUY with a higher target price of RM1.95 (from RM1.90) as we continue to see growth potential in Chin Well’s bottomline following improving margins on better product mix (i.e.: wire rod products). Our target price is arrived by ascribing an unchanged target PER of 9.0x to its FY19 (unchanged) EPS of 21.6 sen. The group is currently trading at a trailing PER of 8.1x, which is below its three-year average PER of 10.0x – indicating room for more upside, in our opinion.

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.

Downside risks to our call include sudden spike in raw material prices, tighter competition, volatile forex movements and unforeseen change in the global trade landscape (i.e.: trade war).  

Source: Mplus Research - 27 Feb 2019