Summary

• Chin Well Holdings Bhd’s 1QFY21 net profit fell 23.1% YoY to RM5.2m, impacted by the lower turnover from the fasteners products segment as it was remain impacted by the Covid-19 pandemic that offset the stronger contribution from the wire products segment. Revenue for the quarter declined 30.9% YoY to RM107.4m.

• The reported net profit came in at 12.9% of our full-year target of RM39.9m and 12.8% of consensus forecast of RM40.2m. The reported revenue was amounted to 18.9% of our full year revenue forecast of RM567.6m and 19.8% of consensus forecast at RM543.0m.

• Segment wise in 1QFY21, the fastener products segment pre-tax profit slipped 47.6% YoY to RM4.2m as it remain impacted by the global supply chain disruption and tighter competition. The wire products segment pre-tax profit, however, surged 833.7% YoY to RM2.6m on higher margins products sold. Elsewhere, we note that Chin Well continues to maintain a lean balance sheet with a net cash position of RM55.6m in 1QFY21.

• Although there were signs of recovery taking shape after emerging from a net loss position in 4QFY20, we reckon that the pace of recovery is expected to remain tepid as companies scaled down their operations. With several countries in Europe returning to lockdown mode, the outlook appears to be relatively challenging.

• On the raw material prices wise, the wired rod prices, a key material for fasteners production are on ascend in recent months. This implies that demand has start to pick-up in recent times, but has yet to recover towards pre-Covid-19 levels.

• Additionally, we also see margins remain weak following the re-opening of China economy as factories resume production. Although the higher shipments to US may provide some alleviation, the slower orders from Europe will continue to weigh on overall performance owing to the differences in the products mix and product requirements between the two regions.

Valuation & Recommendation

• Despite the reported earnings account to less than a quarter of our earnings forecast, we maintained our FY21f forecast premised to the potential recovery in ASP and production moving into subsequent quarters in tandem with the economic recovery progress. Following the recent rebound in share price, we downgraded our recommendation on Chin Well to HOLD (from Buy) with an unchanged target price of RM1.07.

• Our target price is derived by pegging a target PER of 8.0x to FY21f EPS of 13.5 sen. The target PER is also similar to the PER of its closest peer, Tong Herr Resources Bhd. We also note that prospective dividend yields are also fairly attractive at 5.0% for both FY21f and FY22f respectively.

• Downside risks to our call include sudden spike in raw material prices, further tighter competition, volatile forex movements and unforeseen changes in the global trade landscape, sluggish demand as the industry struggles to recover to norm.

Source: Mplus Research - 26 Nov 2020