Kim Hin posted another loss in 3Q18, the third quarter in a row. Core net loss widened in 3Q18 to RM8.6m (+102% qoq), extending 9M18 core net loss to RM16.2m. We expect losses to continue given competitive pricing in the industry, weak property market and higher operating costs. Thus, we forecast losses for FY18/19E of RM27m/RM16m, and cut our FY20E earnings by 71%. We downgrade our call to SELL with a lower TP of RM1.18 based on a target FY19E Price/book of 0.35x.

Below Expectations

Kim Hin incurred a core net loss of RM8.6m (+102% qoq) in 3Q18, extending 9M18 core net loss to RM16.2m (vs. core net profit of RM8.2m in 9M17). This was below our and consensus expectations, compared to our previous FY18E core net profit forecast of RM2m and exceeding consensus forecast of RM3.4m losses. 9M18 revenue decreased by 3% yoy to RM302.4m, while operating costs rose by 5% yoy. We expect losses to continue in 4Q18 given the weak property market, coupled with influx of cheap tiles from neighbouring countries. Operating costs remain high on the back of higher raw material prices and higher electricity and gas tariffs. In 9M18, EBITDA margin eroded to 3.4% compared to 11.2% in 9M17.

Lower Earnings Across All Market

Kim Hin incurred loss before interest and tax (LBIT) of RM6.9m in 9M18 compared to EBIT of RM17.7m in 9M17. This is primarily due to higher LBIT for its Malaysia operation (9-fold increase yoy) plus lower EBIT from Australia (-89% yoy) and China (-45% yoy) operations. Weak housing markets in Malaysia, China and Australia translate to weaker tile demand.

Downgrade to SELL With Lower TP of RM1.18

Given the disappointing results, we now forecast losses of RM27m/RM16m in FY18/19E and cut our FY20E earnings by 71%. We downgrade our call to SELL with a lower TP of RM1.18 based on a FY19E price/book of 0.35x. We believe the sector outlook remains challenging given the weak property market, higher operating costs and stiff domestic pricing competition. We believe its net cash of RM33m or RM0.23/share will support the company to weather the current industry downturn. Key upside risks are higher tile selling prices, stronger tile sales volumes and a faster-than-expected domestic property market recovery.

Source: Affin Hwang Research - 27 Nov 2018