1Q18 CNL of RM10.2m missed expectations on operational deleveraging and higher material prices, which led us to forecast FY18E CNL of RM22.5m before a recovery in FY19E. The group has provided for a write-off totalling c.RM49m, while putting forward a partial material loss claim of >RM150m. The final receiving amount is still uncertain at this juncture. Maintain UP with an unchanged TP of RM0.44 in view of the near-term uncertainty.

Missed expectations. The group recorded 1Q18 core net losses of RM10.2m (<-100% QoQ and YoY), vs. our FY18E CNP of RM9.3m with the culprits being the operational deleveraging (high overhead costs on 40% lower production capacity) as well as higher-thanexpected aluminium costs (which saw its prices increasing further by 5% in 1Q18 after a 17% increase in 4Q17). Note that the CNL has been adjusted for (i) the plant and equipment as well as inventories write-off amounting to RM48.8m as well as (ii) the insurance interim payments of RM30m (two tranches). Meanwhile, absence of dividend was expected as management has decided to defer any dividend payment for now until operations are normalised.

YoY, 1Q18 revenue dropped by 14% on lower sales orders following the fire incident on 20th October 2017 at its main Klang factory. It could have been worse if not for the buffer of two months ready stocks before the incident. Portfolio-wise, Camera products led the drop (-29%) followed by Automotive (-20%) as these products are mainly manufactured in the affected Klang factory previously. As production capacity was down by 40% with the overhead cost unable to be charged out effectively, CNL of RM10.2m was recorded, all on top of the weaker USD/MYR as well as the higher aluminium prices during the quarter. QoQ, revenue dropped by 14% led by Automotive sales followed by Camera. With operational deleveraging, CNL widened to RM10.2m.

Navigating uncertainties. For the post fire incidents update, the group has provided for a write-off totalling to c.RM49m, while putting forward a partial material loss claim of >RM150m (with fire policy based on replacement of equipment and CNC machines). However, the final receiving amount is still uncertain at this juncture. Meanwhile, the business interruption loss is still to be considered for claims. In terms of business, the group had lost one account in the Camera business due to the fire incident. However, this should be partly negated by: (i) its lifestyle consumer electronics project, which should see commencement in March 2018, and (ii) new orders stream with the emergence of two new customers in the semiconductor industry for the manufacturing of precision machine parts fabricated for wire bond, with meaningful fruition to be realised only in FY19. All in, 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 1Q19.

Maintain to UNDERPERFORM with an unchanged TP of RM0.440

(0.4x FY18E PBV). Post results and information updates, we forecast FY18E CNL of RM22.5m before a recovery in FY19E. While we are confident with the management especially on the swift business continuity and contingency plans post fire-incidents, we believe the meaningful operational recovery could only come in by FY19. With uncertainty in the near term, we prefer to stick on the conservative side for now given the major disruption on its production capacity. We will switch the valuation method back to PER methodology to better reflect its earnings recovery once clearer visibility returns. Maintain UP with an unchanged TP of RM0.44 (which implies 10.5x FY19E PER).

Source: Kenanga Research - 26 Feb 2018