Kim Hin’s 3Q17 result showed a strong rebound with net profit of RM5.9m (RM0.6m in 2Q17), driven by higher revenue and improvement in operating profit margin. For 9M17, net profit still showed a 52% yoy decline to RM8.2m from a high base in 9M16. Bottom line was boosted by net exceptional gain of RM2.3m in 9M17. We lift our EPS forecasts by 6-27% in FY17-19E to reflect the net exceptional gain in FY17 and better operating performance. Following the correction in the share price, potential upside to our TP of RM1.73 (based on target FY18E Price/book of 0.45x) has 20%, prompting us to upgrade our recommendation to a BUY from Hold.

Above Expectations

Kim Hin’s 3Q17 result was a positive surprise. Net profit of RM8.2m in 9M17 exceeded our previous full-year forecast of RM7.9m. We were surprised by the higher-than-expected revenue, gross profit margin and net exceptional gain. Revenue increased 10% yoy to RM313m in 9M17, boosted by revenue from Australian-based sales and distribution subsidiary Outset Holdings Pty Ltd, which was acquired on 1 September 2016. But EBIT declined 31% yoy to RM17.9m due to stiff domestic price competition among the tiling manufacturers, which eroded margins.

Investment Gains

Kim Hin recognized a RM2.2m gain from the disposal of investment properties in 3Q17 and a RM2.8m fair value gain in 9M17 that lifted 9M17 result. However, these one-off gains were offset by inventories write-down of RM2.4m and unrealized forex loss of RM0.9m. The net exceptional gain helped shore up 9M17 net profit.

Upgrade to BUY

We raise our EPS forecast by 27% in FY17E to reflect the RM2.3m net exceptional gain and better operating profit. On expectations of higher revenue and operating profit, we lift FY18-19E EPS by 6-10%. Kim Hin declared an interim DPS of RM0.03 and the payment date will be determined later. We forecast DPS of RM0.06 for FY17E, giving attractive net yield of 4.2%. The stock is trading at attractive Price/book of 0.4x. We upgrade our call to BUY from Hold with an unchanged TP of RM1.73, based on target FY18E Price/book of 0.45x.

Source: Affin Hwang Research - 29 Nov 2017