WTHORSE’s 9M18 Core Net Loss (CNL) of RM1.8m missed both consensus’ and our FY18E CNP RM3.2m and RM6.7m, respectively. No dividend was announced as expected. Downgrade to UNDERPERFORM with lower TP of RM1.50 (from RM1.75) given a lower Fwd. PBV valuation of 0.50x (from 0.56x) based on FY19E BV/share of RM3.02 (from FY18E BV/share of RM3.21).

9M18 missed expectations. Excluding one-off unrealised forex loss (RM3.3m), Property Plant and Equipment (PPE) write-down (RM0.09m) and loss on disposal of PPE (RM0.09m), 9M18 CNL of RM1.8m missed both consensus’ and our FY18E CNP RM3.2m and RM6.7m, respectively. The negative deviation stemmed from lower-than-expected tiles demand in Malaysia and Vietnam and weaker-than-expected ASPs leading to margins erosion. No dividend was announced as expected.

Results highlight. YoY, 9M18 registered CNL of RM1.8m from a CNP position of RM17.2m owing to weaker performance from both of its Malaysia and Vietnam operations due to weak market demand coupled with stiff pricing competition. QoQ, 3Q18 registered CNL of RM1.1m (after reversal of unrealised forex loss of RM4.3m) vis-à-vis CNP of RM3.6m in 2Q18. We believe that the poor performance was mainly dragged by weaker-than –expected volume production and ASPs arising from the intense competition that led to margins erosion.

Outlook. Management noted that business operations remain challenging in view of market competitiveness and high production and operating cost. We are cautious over WTHORSE’s outlook due to the slowing down of property and construction jobs in the market affecting its sales volume, coupled with rising cost pressure.

Earnings revision. We cut our FY18/19E earnings estimates by 162%/187% to CNL of RM4.1m/RM8.2m after accounting for weaker plant utilization and weaker ASPs for both Malaysia and Vietnam markets in view of the slower industry demand leading to stiffer competition.

Downgrade to UNDERPERFORM with lower TP of RM1.50 (from RM1.75) given a lower Fwd. PBV valuation of 0.50x (from 0.56x) based on updated historical trough levels while we also roll forward our valuation base to FY19E BV/share of RM3.02 (from FY18E BV/share of RM3.21). We believe our UNDERPERFORM call is justified given (i) this is the 3rd quarterly loss WTHORSE has registered since 4Q17 (ii) the subdued property market suppressing demand for tiles, (iii) potential write-down in inventories from slow moving goods, and (iv) rising energy (natural gas) and labour costs, which make up substantial portion of operating costs at c.40%.

Risks to our call include sharp rises/falls in ASPs and production volume.

Source: Kenanga Research - 23 Nov 2018