1Q18 CNL (core net loss) of RM4.2m missed our/consensus FY18E CNP estimates of RM13m/RM12m due to lower-thanexpected tiles demand leading to lower-than-expected revenue. No dividends declared as expected. Cut FY18/19E estimates by 48/42% in view of slower tiles demand. Maintaining MP with lower TP of RM1.75.

1Q18 missed expectations. 1Q18 CNL (core net loss) of RM4.2m missed our/consensus FY18E CNP estimates of RM13m/RM12m due to lower-than-expected tiles demand in Malaysia and Vietnam leading to lower-than-expected revenues. No dividends declared as expected. We derive our CNL estimate after reversing out unrealized FX gains of RM8.0m.

Results highlight. 1Q18 CNL of RM4.2m narrowed QoQ (from 4Q17 CNL of RM8.1m) despite the lower revenue (-14%) due to the absence of inventories write-off which 4Q17 suffered (write-off of c.RM20m). 1Q18 CNL was down from a CNP position of RM1.1m YoY despite revenue being relatively flat as total group EBITDA margin contracted by 3ppt. The contraction of the EBITDA margin YoY was a combination of weaker ASPs from the stiffer competition and higher operating costs i.e. natural gas.

Outlook. For FY18, we believe prospects for the tiles industry will 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 cut. We cut our FY18/19E earnings estimates by 48%/42% to RM6.7m/RM9.5m after accounting for weaker plant utilization and weaker ASPs in view of the slower industry demand leading to stiffer competition.

Maintain MARKET PERFORM with a lower TP of RM1.75 (from RM1.80) based on an unchanged FY18E PBV of 0.56x (implying 5-year historical low PBV) post earnings cut. We believe our 0.56x PBV valuation is fair as we remain cautious due to: (i) the subdued property market which would suppress demand for tiles, (ii) potential write-down in inventories from slow moving goods, and (iii) rising energy (natural gas) and labour costs, which make up a substantial portion of operating costs at c.40%.

Source: Kenanga Research - 24 May 2018