THR's  results  for  its  3QFY12  were  weaker  than  expected,  while  its  9MFY12 cumulative  net  profit  only  accounted  for  36.5%  of  consensus  earnings.  Such disappointing  results  were  mainly  due  to  the  economic  slowdown,  especially  in the Eurozone, and the company's earnings were further dampened by losses in its associates. We think that THR's outlook remains challenging and are lowering our FY12 and FY13 earnings forecasts, revaluing the company based on a 0.53x FY13f BV, a -0.5 SD from the mean of its five-year historical trading band. Downgrade to SELL, with a FV of RM1.56.

A weaker quarter.  Tong Herr Resources (THR) reported net profit of RM0.7m (-81.5% q-o-q, >-100.0% y-o-y), which was below consensus estimates. The company's drop in revenue (-6.8% q-o-q, -24.5% y-o-y) was mainly due to the global economic slowdown, especially in the Eurozone, which also led to a drop in PBT for the quarter under review. Both  its  operating  divisions  recorded  negative  q-o-q  growth  on  segmental  profit (stainless  steel  fasteners:  -4.4%;  aluminium  products:  -50.7%).  On  top  of  that,  its management  guided  that  the  share  losses  from  the  investment  in  associates  have further narrowed the company's bottomline (3QFY12: -RM2.8m vs 2QFY12:+RM7k). 
 
Outlook still challenging. We think that THR's profit visibility remains gloomy and the outlook continues to be challenging. This is mainly attributed to the uncertainties in the Eurozone economy coupled with the slow recovery of US as these markets make up the largest  revenue  contributions  to  THR.  In  addition,  the  global  economy  has  been  very fragile  since  the  2008/2009  global  financial  crisis,  and  persistent  weaknesses  have continued to dampen growth.

Slashing  our  earnings  forecast.  We  reviewed  our  valuation  model  and  take  this opportunity to revalue the company. Based on our bearish view on the company, we are slashing  our  earnings  projections  for  FY12  and  FY13  by  55.2%%  and  46.1% respectively.

Downgrade  to  SELL,  FV  RM1.56.  We  revalue  the  company  based  on  a  0.53x  FY13f BV,  -0.5  SD  from  the  mean  of  its  five-year  historical  trading  band,  which  was  also  its historical low and derive a new FV of RM1.56. Downgrade to SELL.

Source: OSK