Results Review

• Chin Well Holdings Bhd’s 2QFY20 net profit plunged 72.7% Y.o.Y to RM4.3 mln, from RM15.7 mln previously, mainly due to weaker EBITDA margins, in-tandem with the drop is sales volumes and ASPs. Revenue was also down by 10.6% Y.o.Y to RM147.7 mln vs RM165.1 mln last year. Subsequently, the group has declared a single interim dividend of 1.5 sen per share (from 4.5 sen in 2QFY19), payable on 22th May, 2020.

• The weaker 2QFY20 earnings also pushed the cumulative 1HFY20 net profit to RM11.0 mln (-67.3% Y.o.Y), from RM33.6 mln earlier, although revenue only fell 11.2% Y.o.Y to RM303.2 mln, from RM341.5 mln in the same period last year. The reported net profit and revenue came in below expectations, accounting for 19.0% and 41.6% of our previous full-year target of RM57.9 mln and RM728.0 mln respectively. The variance was mainly due to lower-than-expected margins and lower factory efficiency rate.

• Moving forward, we slashed our FY20-FY21 forecast estimates by 43.6%-20.2% to RM35.8 mln and RM50.7 mln respectively, to account for the weaker margins and lower sales volumes amid increasingly challenging business landscape. Revenue, meanwhile, is expected to fall to RM631.7 (-14.5%) and RM656.1 mln (-11.2%) respectively.

Prospects

Despite the continuous drop in orders from Europe, we believe that sales have bottomed out and a mild recovery is due even as major DIY chains hold back bulk purchases and buy on a requirement basis amid rising global uncertainties. Further, in a bid to alleviate weaker selling volumes, we also expect increased revenue from steel trading, although earnings margin is expected to narrow due to the lower premium of trading sales compared to the sale of fasteners or wire rod products.

Meanwhile, the group has received increased inquiries and orders since the virus outbreak in China prompted the authorities to shutdown factory operations and major logistic hubs in a bid to contain the spread of Covid-19.

On the downside, we remain cautious of the impact a prolonged coronavirus outbreak will have on global economic health. Already, we see an increasing risk of global supplychain disruption and signs of a broad economic slowdown in major countries. Subsequently, this could have a rippled effect on the manufacturing and construction industry, resulting in weaker demand for finished steel products.

In conclusion, we expect business to be challenging this year as companies struggles with lackluster demand and slower economic growth, weighed down by the proliferation of Covid-19, unstable trade relations and political uncertainties ahead of the U.S. Presidential election and Brexit.

Valuation and Recommendation

We downgrade our recommendation on Chin Well to SELL (from Buy) with a lower target price of RM1.10 (from RM1.75) by ascribing an unchanged target PER of 9.0x to Chin Well FY20 EPS of 12.2 sen (from 19.7 sen) due to the increasing risk of weaker profitability in the near-term and weak sequential earnings growth.

Meanwhile, dividend payout is also expected to drop this year; indicated by the lower single-tier interim dividend of only 1.5 sen per share vs 4.5 sen last year. Further, the group is also trading at a prospective PER of 11.1x, which is higher than its two-year PE mean of about 9.0x.

The target PER is at a small premium to the PER of its closest peer, Tong Herr Resources Bhd, premised on Chin Well’s higher margins and proven earnings track record.

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 - 28 Feb 2020