FY17 CNL of RM0.8m missed our CNP estimates of RM14m due to weaker-than-expected top-line from lower-thanexpected tiles demand coupled with unexpected write-down in slow moving inventories worth c.RM20m. A 2.0 sen dividend was declared; bringing FY17 dividend to 7.0 sen - below our 10.0 sen estimate. Slash FY18E earnings by 24% to RM13m and introduce FY19E earnings of RM16m. Maintain MP with lower TP of RM1.80 on unchanged 0.56x FY18E PBV (-1SD).

Below expectations. FY17 CNL (core net loss) of RM0.8m missed our CNP estimates of RM14m due to weaker revenue from lower-thanexpected tiles demand in Malaysia and Vietnam coupled with unexpected write-down in slow moving inventories worth c.RM20m in 4Q17. A 2.0 sen final dividend was declared; bringing FY17 dividend to 7.0 sen - below our 10.0 sen estimate. We highlight that WTHORSE has been consistently dishing out 10.0 sen dividend/annum since 2009 and we view the current non-payment negatively. We derive our CNL estimate after reversing out unrealized FX gains of RM6.2m.

Results highlight. FY17 CNL of RM0.8m dipped into the red (vs. FY16 CNP of RM37.5m) due to: (i) weaker revenue (-8%) from slower sales in Malaysia, and (ii) write-down of slow moving inventories worth c.RM20m causing EBITDA margin to contract 4ppt. 4Q17 CNL of RM8.1m also sank into the red QoQ due to similar reasons stated above.

Outlook. Moving into FY18, we believe the tiles industry would remain challenging due to: (i) rising cost pressures i.e. hike in natural gas and labour cost (minimum wage review in FY18), (ii) weak tiles demand owing to the subdued property market, and (iii) increasing competition from local importers given that MYR has strengthened against the USD providing wider import opportunities for local traders.

Earnings estimate. We cut our FY18E earnings estimates by 24% to RM13m after accounting for weaker revenue from Vietnam and Malaysia due to the slower demand. Subsequently, we introduce our FY19E CNP of RM16m. Note that we have also trimmed our FY18E DPS assumption to 7.0 sen (from 10.0 sen).

Maintain MARKET PERFORM with a lower TP of RM1.80 (from RM1.90) based on unchanged FY18E PBV of 0.56x (5 years -1.0SD). We believe our 0.56x PBV valuation at -1.0SD is fair as we remain cautious with; (i) the property market which would suppress demand for tiles, (ii) potentially further write down in inventories, and (iii) rising energy (electricity, natural gas) and labour costs, which make up a substantial portion of operating costs at c.40%.

Source: Kenanga Research - 1 Mar 2018