Results Review

• Chin Well Holdings Bhd posted a 44.0% Y.o.Y jump in its 3QFY19 net profit to RM12.3 mln, from RM8.6 mln previously, backed by improved performances across the fasteners and wire rod segment, albeit slightly offset by higher raw material prices. Revenue for the quarter also grew by 21.2% Y.o.Y to RM173.0 mln, from RM142.8 mln in 9MFY18.

• Cumulative 9MFY19 net profit, meanwhile, added 21.2% Y.o.Y to RM45.9 mln, from RM37.9 mln a year ago, owing to stronger revenue contribution of RM514.5 mln (+16.6% Y.o.Y), coupled with lower selling & distribution and administrative expenses.

• Segment-wise, the fasteners division recorded a strong net profit growth of 39.3% to RM12.3 mln, while the net loss from the wire rod division narrowed to RM0.2 mln, from RM0.3 mln previously, in-tandem with higher sales volumes.

• The reported net profit and revenue were within our forecast, accounting to 72.2% and 78.0% of our previous full year forecast of RM63.6 mln and RM659.9 mln respectively. As such, we only made minimal adjustments to our FY19-FY20 estimates after taking into account lower margins amid inflated wire rod prices and higher interest expenses due to increased debt. FY19’s net profit was revised to RM62.0 mln (-2.5%), with a revenue of RM684.6 mln (+3.7%). Revenue for FY20 was also tweaked higher to RM709.6 mln (+2.2%), while net profit remain almost unchanged.

Prospects

The landscape in Europe remains unexciting as retailers hold back large orders and only purchase on need-to basis. As such, we think that export growth to the EU region will slowdown in the near-term amid lower demand and political uncertainties plaguing the region.

On the other hand, increasing sales from the U.S. following Washington’s ongoing tariff war with China will help cushion the slower growth in the EU. Notably, U.S. sales jumped ten-fold to about RM40.0 mln in 9MFY19, compared to RM4.0 mln previously. As turnover contributed from U.S. orders only account to less than 10% of total group sales and China is among the top three suppliers of U.S. fasteners, we think that there is more room for future growth.

The wire rod segment, meanwhile, is also expected to report steady growth as the group ramps up its floor production rate, in-tandem with higher demand for downstream wire products, albeit partially offset by rising wire rod prices. Despite higher borrowings, we expect the group to maintain its net cash position as it has been in the past few years and continue to reward shareholders with reasonable dividend yields ranging from 4.7%-5.1%.

Valuation and Recommendation

We reiterate our BUY call on Chin Well with an unchanged target price of RM2.05 on expectations of a sustained growth momentum, which is backed by its ongoing capacity expansion and upgrades, healthy demand for downstream wire products and improved efficiency. In addition, the stock also offers a reasonable dividend yield of 4.7%-5.1%.

Our target price is arrived by ascribing an unchanged target PER of 9.0x to Chin Well’s revised FY19 EPS of 22.9 sen. The group is currently trading at a forward PER of 7.8x, which is below its three-year average PER of 9.0x – 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 - 29 May 2019