Chin Well Holdings (Chin Well) reported a weaker net profit of RM2.6m (-47.4% YoY, -12.4% QoQ) for 1QFY24 as demand wanes. Results are below both our and consensus expectations, accounting for 5.3% and 6.0% of full year estimates respectively. The discrepancy in our results was mainly due to weaker than expected demand from the US market. However, we keep our earnings forecast unchanged as management anticipates orders to pick up in the coming quarters driven by major construction projects underway and restocking activities. We maintain our Neutral call on Chin Well with unchanged PE-based target price pf RM1.17. No dividend was declared for the current quarter.

• 1QFY24 revenue fell to RM83.8m (-47.4% YoY, - 12.4% QoQ) on weaker contribution from the Fasteners (-49.9% YoY, -37.2% QoQ) and Wire products (-37.2% YoY, +8.0% QoQ). The demand for both divisions was affected by softer global demand amid economic headwinds and on-going geopolitical conflicts, particularly in the European market.

• 1QFY24 earnings were down to RM2.6m (-90.1% YoY, -49.3% QoQ) due to lower revenue and margin. Pre-tax margin fell to 4.0% (1Q24: 21.5%, 4Q23: 6.5%) owing to lower selling prices (ASP) following the drop in global wire rod price and competition from China.

• Outlook. The near-term outlook for the Group remains mixed. Persistently high core inflation, elevated interest rates in most economies and on-going geopolitical conflicts continue to weigh on global growth and dampened demand for the Fasteners product. Nevertheless, there were some improvements in the Group’s operating environment. Headline inflation is showing signs of cooling while commodities prices and freight rates are falling back to pre-pandemic levels as supply chains continue to recover. Besides that, management anticipates orders to pick up in coming quarters driven by major construction projects underway and restocking activities as the inventory overstocking situation eases. The Group also remains committed to pursuing business growth by increasing its distribution network in the European and US markets, as well as expansion of new products in the downstream market to cushion margin squeeze and weakening demand.

Source: PublicInvest Research - 30 Nov 2023