FY17 results and DPS missed due to dismal 4Q17 losses. Higher raw material prices and unfavourable forex translation were the main culprits. Accounting these together with our conservative assumption on the operational deleveraging (post fire incident), we cut our FY18E CNP by 40% before expecting a recovery in FY19 with our CNP forecast of RM14.0m (+51%). Downgrade to UP with a lower TP of RM0.440 (based on 0.4x FY18E PBV).

Missed expectations. The group recorded 4Q17 core net losses of RM0.8m (-128% QoQ, -147% YoY), narrowing the FY17 core NP to RM11.8m (+172%) which only made up 68% of our estimate. The negative deviations were due to: (i) higher-than-expected Aluminium costs (which saw its prices higher by 17% in that quarter alone) as well as (ii) unfavourable forex translation (with USD weakening to RM4.26/USD; -2%). Absence of dividend was also unexpected as management had decided to defer any dividend payment for this quarter and next quarter, until operations are normalised.

YoY, FY17 revenue grew by 18% underpinned by the growth from all segments with marginal support from stronger USD. Topping the list, the Auto segment jumped 27% on higher production ramp-up from plungers (for Automotive ABS application) followed by strong growth from Engineered products (+15%). At the bottom-line, CNP swung from losses to RM11.8m driven by: (i) better product mixes, (ii) better utilisation of CNC machining as well as (iii) the absence of settlement for adverse currency hedging alongside the low base in 9M16. QoQ, 4Q17 revenue was relatively unchanged at RM67.9m (3Q17 revenue: RM67.8m). While HDD sales rebounded by 9% on stronger seasonality, turnover from other engineered products (Consumer Electronics) dropped by 26% which negated the abovementioned solid growth. Meanwhile, Automotive sales maintained its solid turnover at RM23.9m (+1%). At the operational level, EBIT dropped by 48% on higher Aluminium prices as well as higher depreciation and amortisation of RM9.2m (vs. RM8.4m in 3QFY17). Coupled with higher taxation of RM1.2m, the group recorded core losses of RM0.8m.

Updates post-incident. Management is still in the process of ascertaining losses and the computation of claims, and should finalise the claimed amount in few months’ time. Meanwhile, the group has put in an initial claim to the insurer to ease the recovery process. As of to date, the group has ordered 290 CNCs and is buying a 60k sq ft factory (for RM10m) to cater for its business which were housed in Factory 1 previously. From our previous understanding, we believe the impact could be at least c.RM125m with breakdown being: net book value of RM23.6m for its Lot 6123 premise as well as RM100m for CNC machines (assuming RM200k for each of the 500 damaged CNCs). We believe that the gestation period could be longer than the previous incident (which was 6 months) considering the more severe impact this round. In our base case, we only assume full recovery in 1QFY19.

Downgrade to UNDERPERFORM with a more conservative TP of RM0.440 (from RM0.730). We cut our FY18E NP by 40% to account for higher material costs, operational deleveraging on lower utilisation as well as USD assumption of RM4.20/USD (from RM4.30/USD previously). Meanwhile, we introduce our FY19E NP (+51%); expecting earnings contribution from new Consumer Electronic business as well as sales normalisation from HDD segment. With uncertainty in the near term, we prefer to stick on the conservative side for now given the major disruption on its production capacity pending further updates. With a lower PBV of 0.4x (which is being its trough valuation throughout the past five years period; from 0.65x), we derive our TP of RM0.440. This implies 15.7x FY18E PER and 10.5x FY19E PER.

Source: Kenanga Research - 29 Nov 2017