• Missed expectations. Mieco posted a 1Q18 core net loss of RM6.6m (1Q17: RM5.2m, 4Q17: RM1.1m), vs our full year 2018 estimate of RM34.5m. This was below estimates, no thanks to the negative operating dynamics at the furniture industry. Similar to past practices, no dividends were declared between the January-March period.

• Revenue grew sequentially thanks to Great Platform. During the quarter, revenue rose 6.8% qoq primarily attributed to maiden contribution of the newly-acquired Great Platform. Nevertheless, top-line fell 2.4% yoy on the back of: a) weaker ASPs (given intense price-based competition), and b) lower sales volume and lower utilisation rate due to festive season.
• Dragged by negative operating and financial leverage. In 1Q18, core EBIT fell qoq into the red of RM4.1m, no thanks to negative operating leverage, escalating rubberwood and glue costs. These, coupled with higher finance expense (+82.4% qoq due to higher borrowings), weighed down core bottom line to a loss of RM6.6m (1Q17: RM5.2m, 4Q17: RM1.1m).
• Update and outlook. Although 1Q18 continued to be challenging, we expect to see improvement in the subsequent quarters. Firstly, we understand competition has started to ease in April and thus, we expect ASP pressure to soften. Also, we gathered that raw material costs have been holding steady post-1Q18.
• Cut 2018-20 EPS by 22-45% as we take into account lower ASP and higher costs. Key downside risks include: a) market share losses, b) failing to make strong inroads into the E0 and Super E0 particleboard markets, which command better margins, and c) higher-than-expected cost inflation.

• Maintain HOLD with a lower target price of RM0.44 (from RM0.68) as a result our earnings cut. Our target price is based on 8x 2019F PE, in line with the stock’s 5-year forward mean PE of 9x but above the sector mean of 7x. The premium is supported by its leadership position in the local particleboard scene. Despite share price having fallen 64% since our rating downgrade in Nov 17, we believe this is still not a good time to accumulate the stock as it lacks near-term positive catalysts. Entry level is RM0.40.

Source: UOB Kay Hian Research - 31 May 2018