As one of Malaysia’s leading tile manufacturers, Kim Hin has about a 25% share of the domestic revenue of the four Malaysian-listed pure-play tile manufacturers. With 44 years of experience, the company has an international presence with operations in Malaysia, China, Australia and Vietnam. We expect moderate earnings growth in FY18/19E of 15/23% yoy given rising energy costs, intense price competition among manufacturers and lower export revenue due to Ringgit appreciation against the US$. But this could be partially offset by a better contribution from Australia, where a moderate property market recovery could drive higher ceramic demand. We initiate coverage with a HOLD call and 12-month TP of RM1.73, based on a Price/Book ratio of 0.45x (10% discount to peer average).

Strategic Acquisitions

Kim Him embarked on 3 key acquisitions to expand its ceramic tile business in FY14-16. Norcros Industry Pty Ltd and Outset Holdings Pty Ltd were acquired to expand its distribution channels. Johan Ceramic’s manufacturing plant in Seremban was acquired in FY15. Kim Him plans to allocate RM10m to upgrade existing facilities, utilizing part of the RM29.9m of proceeds from Australian asset disposals.

Growing Market Share Amidst a Challenging Market

Kim Hin’s domestic revenue share among the 4 listed tile players has been growing steadily to 25% (+5ppts) in FY16 amidst challenging ceramic market conditions, due to the weak property market since FY14. Historically, 70% of Kim Hin’s revenue is derived from the domestic market with the balance from exports. However, we expect more new property launches (1Q17: +23.1 qoq), a recovery in property transaction volumes and a more active secondary home market to potentially drive higher ceramic tile demand in FY18.

Initiating Coverage With a HOLD Rating and TP of RM1.73

We initiate coverage on Kim Hin with a HOLD rating. Our 12-month TP of RM1.73 is based on a Price/Book of 0.45x, a 10% discount to peer-average Price/Book given: i) earnings and margin volatility in the ceramic tile business; and ii) historical book value used in our peer comparison. We see limited nearterm catalysts for earnings due to the property market slowdown and margin compression as competition has intensified among the ceramic players. Given its strong net cash position (20 sen/share) and strong FCF (13.4sen/share), we forecast DPS of 6 sen in FY17-19E to be maintained, giving a reasonable net yield of 3.6%.

Source: Affin Hwang Research - 3 Nov 2017