Results Review

• Chin Well Holdings Bhd‘s 4QFY19 net profit narrowed 35.2% Y.o.Y to RM11.7 mln, from RM18.0 mln a year ago, dragged down by lower margins in the fasteners segment, coupled with higher initial start-up costs. Quarterly revenue, however, rose 10.8% Y.o.Y to RM166.2 mln, from RM150.0 mln in the fourth quarter last year. Despite the softer quarter, the group declared a single tier second interim dividend of 3.35 sen, payable on 25th November 2019.

• Cumulative full-year net profit inched higher to RM57.6 mln vs. RM55.9 mln in FY18, but capped by lower fasteners sales and higher raw material as well as start-up costs from the commencement of new production lines in April. Revenue, meanwhile, gained 15.1% Y.o.Y to RM680.7 mln, from RM591.3 mln last year.

• The reported net profit came slightly below our expectations as it only accounted for 92.9% of our full year earnings forecast of RM62.0 mln. On the positive side, revenue was in-line, accounting for 99.4% of our estimated revenue of RM684.6 mln. The difference was mainly attributed to lower-than-anticipated EBITDA margins and increased depreciation charges.

• Even so, we largely maintain our FY20 forecast as we forwarded the continued growth estimates to both Chin Well’s topline and bottomline, driven by the increasing demand for fasteners from the U.S. and gradual capacity expansion, albeit slightly capped by slowing orders from Europe amid the rising competition.

Prospects

Expansion-wise, the group expects to increase its industrial fastener production to 120,000 tonnes next year, from 105,000 tonnes to cater to growing demand from U.S. customers as the country reduces sourcing from China due to increased tariffs. Subsequently, we expect strong sales growth to U.S. in 2020 as Chin Well’s Chinese counterpart suffers from higher tariffs on most fastening products. Sales to U.S. customers grew to 10.6% (or RM72.0 mln) of total group sales, from only 2.6% (or RM15.5 mln) in FY18.

On the downside, the flood of fasteners from China that diverted into the European markets will remain a key hurdle for export growth to the region due to increased supply and uncertainties in the market. Annual European sales fell 14.1% Y.o.Y to RM211.2 mln and accounts to about 31.0% of total group sales, down from 41.6% previously.

Chin Well has also commenced the production of reinforcement bar connectors in Vietnam, which are targeted for the South-East Asian markets. The group is also looking to increase its wire products export to the Middle East, South Asia and Australia next year.

According to the San Francisco-based Grand View research house, the global industrial fasteners market size, estimated at US$83.3 bln in 2018, is anticipated to expand at a compounded annual growth rate (CAGR) of 4.1% over the 2019-2025 period. Thus, we still foresee reasonable growth in the fasteners industry, going forward.

Valuation and Recommendation

We maintain our BUY call on Chin Well with an unchanged target price of RM2.05 by ascribing an unchanged target PER of 9.0x to Chin Well FY20 EPS of 22.9 sen by as we continue to believe in its long-term investment merits despite the current challenges, backed by its proven track record in generating cash, increasing fastener sales and capacity expansion.

The group is currently trading at a forward PER of 7.6x, which is below its three-year average PER of 9.0x – indicating room for more upsides, 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 positive growth trajectory.

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 Aug 2019