Chin Hin Group (CHG) reported a 1QFY22 net profit of RM26.2m (+72.7% YoY, +>100% QoQ), aided mainly by disposal gains from the partial divestment of its stake in Solarvest Holdings (SHB). The results are in line with expectations at 26% of full-year numbers which accounts for the said gains (also realized post-1QFY22). Income on a business-as-usual basis was notably weaker however, weighed by cost pressures and its inability to pass on increases to customers as quickly. We keep earnings estimates unchanged at this juncture nonetheless, on expectations of normalization in the coming quarters, underpinned by improved business conditions and construction-related activity. Our sum-of-parts derived target price is unchanged at RM2.89, though the recent acquisition of Fiamma Holdings by 32.5%-owned Signature International (SIB) could add 5sen to the valuation through its indirect stake. We retain our Neutral call on CHG as we still see potential in its other listed investments, 59.4%-owned Chin Hin Group Property (CHGP) and 24.7%-owned Ajiya and its longer-term business proposition, though we reckon these are very much fully-valued for now.

• 1QFY22 positives were somewhat lacking from an operational standpoint, with the distribution and wire mesh businesses the only two profitable divisions on the back of continued revenue improvements (+2.8% YoY and +17.6% YoY respectively). Of note is the RM23.6m disposal gain recognized from the sale of Solarvest Holdings shares.

• 1QFY22 negatives outweighed the positives, with 1) the ready-mixed concrete segment suffering losses due to sudden increases in cement prices and its inability to negotiate for price adjustments with its customers as expeditiously, 2) the fire-rated door business still being in the red due to labor shortages which affected production, and 3) the autoclaved aerated concrete (AAC) and precast concrete businesses recording losses due to cost increases. The Group’s interest payments have also increased this current quarter due to additional loan drawdowns to fund recent acquisitions (of land bank and businesses), though we believe the Group should have no issues servicing these commitments given the monetization options it has, if necessary.

• Recent developments. While certain divisions are making inroads in terms of securing new contracts (G-Cast: ECRL (Malaysia) and Thomson East Coast Line (Singapore)), others (polymer concrete pipe, AAC) are facing challenges due to COVID-19 related disruptions. Listed-associate SIB has an outstanding order book of ~RM550m while indirectly wholly-owned (through CHGP) construction outfit Kayangan Kemas Group has an order book of about RM500m as at mid-May 2022, providing some earnings visibility till 2025.

Source: PublicInvest Research - 26 May 2022