In the Red

Kim Hin posted disappointing 1Q18 results. The group recorded a net loss of RM5.4m compared to net profit of RM1.8m in 1Q17. This was mainly attributable to the squeeze in its profit margin due to rising utility, raw-material and selling & distribution costs. However, revenue increased by 4% yoy, mainly due to higher revenue contributions from Vietnam, Malaysia and Australia. We cut our 2018- 20E forecasts by 17-41% to account for higher operating costs and maintain our HOLD rating with a lower 12-month TP of RM1.30 based on a target 2018E Price/book of 0.35x, given the challenging sector outlook.

Surprise Loss

Kim Hin recorded a net loss of RM5.4m in 1Q18 compared to our previous full-year 2018E net profit forecast of RM10.1m. Revenue increased by 4.3% yoy to RM98.9m on the back of higher contributions from Vietnam (+10.2%), Malaysia (+8.4%) and Australia (+2.4%), partially offset by lower revenue from China (-3.6%).

Higher Costs

However, operating costs rose at a higher rate of 10.6% yoy to RM96.8m, mainly due to higher selling & distribution expenses (partly due to the increase in promotion costs to expand its Johnson Tiles brand in Malaysia) and higher raw-materials and utility costs. Coupled with stiff domestic price competition, the EBITDA margin eroded by 5.6ppts to 2%. Excluding oneoff items, its core net loss widened to RM3.4m in 1Q18 compared to RM0.2m in 1Q17. 1Q is seasonally a weak quarter due to festive holidays and we expect a turnaround in subsequent quarters.

Maintain HOLD

We cut our 2018E-20E forecasts by 17-41% given higher operating costs and weak domestic selling prices. We maintain our HOLD call with a lower TP of RM1.30 (from RM1.73), based on a lower 2018E Price/book of 0.35x (previously was 0.45x). We believe its net cash of RM38m or RM0.27/share and attractive net yield of 5.1% will support the current share price. Key upside/downside risks are higher/lower tile selling prices, stronger/weaker tile sales volumes and a recovery/prolonged downturn in the domestic property market.

Source: Affin Hwang Research - 30 May 2018