Kim Hin’s 6M19 results were disappointing. Though revenue improved by 14% qoq to RM96m, its core net loss widened by 9% qoq to RM12m, mainly due to higher operating costs and higher tax expense. On a yoy basis, core net loss tripled to RM20m on the back of lower revenue and higher per unit operating costs. Given the weaker-than-expected result, we increase our 2019E core net loss by 66%, and cut our 2020-21E earnings by 1-3%. Reaffirm our SELL call with a lower TP of RM1.06, based on 2020E Price/book of 0.35x.

Larger-than-expected Losses

Kim Hin’s 6M19 core net loss tripled to to RM22.3m in 6M19, compared to our previous and consensus full-year 2019E core net loss forecasts of RM20.3m and RM18.1m, respectively. Revenue was lower by 8% yoy to RM179.6m due to lower revenue across most of its geographical segments of which the group operates – Malaysia (-2% yoy), China (-21% yoy) and Australia (-12% yoy). The group recorded losses before interest, tax and depreciation (LBIT) of RM8.8m in 6M19 (vs. EBITDA of RM4.4m in 6M18) due to higher per unit operating costs.

Core Net Loss Widen by 9% Qoq

Sequentially, Kim Hin’s 2Q19 core net loss widened by 9% qoq to RM11.6m. Though revenue improved by 14% qoq to RM95.7m, core net loss was higher due to increase in costs of goods sold (+7% qoq), administration cost (+3% qoq) and tax expense (+27% qoq). We expect 2H19 losses to narrow as revenue is typically better due to seasonal factors, partially offset by higher natural gas costs.

Maintain SELL With An Unchanged TP of RM1.10

We increase our 2019E loss by 66%, and cut our 2020-21E earnings by 1- 3% accounting for lower-than-expected 6M19 results. We maintain our SELL call with a lower TP of RM1.06 based on 2020E Price/book of 0.35x. We believe the tiles sector outlook remains challenging given the prolonged soft property market and stiff price competition arising from the influx of cheap tiles from neighbouring countries. That said, we believe its net cash of RM20.6m or 15sen/share will support the company to weather the downturn in the sector.

Key Risks

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 - 26 Aug 2019