Kim Hin posted another disappointing result in 1H18. Core net loss widened to RM7.7m in 1H18 compared to RM0.3m in 1H17. This was mainly attributable to the contraction in its profit margin given rising raw material prices, higher selling and distribution expenses and utilities cost. Revenue was down 1% yoy, while operating costs rose at a higher rate of 8% yoy. We cut our 2018-20E forecasts by 23-46% to account for higher operating costs. We maintain our HOLD rating with an unchanged TP of RM1.30 based on a target 2018E Price/book of 0.35x, given the challenging sector outlook.

1H18 Core Net Loss Widened to RM7.7m

Kim Hin recorded a core net loss of RM7.7m compared to RM0.3m in 1H17. Revenue decreased marginally by 1.3% yoy to RM196.1m on the back of lower revenue contribution from China (-14.6%) and Malaysia (- 0.1%), partially offset by higher revenue from Australia (+2.9%) and Vietnam (+0.1%). However, operating costs rose at a higher rate of 8.2% yoy to RM191.6m mainly due to higher selling and distribution expenses and higher raw material and energy prices. This resulted in EBITDA margin erosion to 2.3% in 1H18 compared to 10.9% in 1H17.

Higher Core Net Loss of RM4.2m in 2Q18

Sequentially, Kim Hin’s 2Q18 core net loss widened by 24.2% qoq to RM4.2m as the domestic property market remained soft while domestic price competition is still stiff. However, EBITDA margin improved to 2.6% in 2Q18 compared to 2.0% in 1Q18. We expect earnings to fare better in 2H18 partly due to the tax holiday (no GST) in Jun18-Aug18.

Maintain HOLD

We cut our 2018E-20E forecasts by 23-46% given higher operating costs and soft tiles demand due to the subdued property market. We maintain our HOLD call with an unchanged TP of RM1.30, based on a 2018E Price/book of 0.35x. We believe its net cash of RM37m 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 - 29 Aug 2018