FY18 CNL of RM23.7m missed both consensus’ and our FY18 CNL RM4.1m and RM4.4m, respectively. No dividend was announced, as expected. Maintain UNDERPERFORM call on WTHORSE with lower TP of RM1.15 (from RM1.20) based on unchanged 0.40x Fwd. PBV pegged to lower FY19E BV/share of RM2.87 (from RM3.02).

Below expectations. Excluding one-off unrealised forex loss (RM3.1m), Property Plant and Equipment (PPE) write-down (RM0.33m) and loss on disposal of PPE (RM0.01m), FY18 CNL of RM23.7m missed both consensus’ and our FY18 CNL RM4.1m and RM4.4m, respectively. The negative deviation stemmed from lower-than-expected tiles demand in Malaysia and Vietnam and weaker-than-expected ASPs as well as higher production cost leading to margins erosion. No dividend was announced, as expected.

Results highlight. YoY, FY18 registered CNL of RM23.7m from a CNP position of RM5.4m owing to weaker performance from both its Malaysia and Vietnam operations due to weak market demand coupled with stiff pricing competition. QoQ, 4Q18 CNL of RM21.7m widened vis-à-vis CNL of RM1.1m in 3Q18 mainly due to higher operating expenses such price hike in natural gas leading margins erosion.

Outlook. We are cautious over WTHORSE’s growth prospect due to the slowing down of property and construction jobs in the market affecting its sales volume, coupled with rising cost pressure. Moving into FY19, we believe the tiles industry would remain challenging due to: (i) rising cost pressures i.e. hike in natural gas and labour cost (potential minimum wage revision), and (ii) weak tiles demand owing to the softened property market.

Earnings estimate. Post results, we widen our FY19E CNL further to RM9.1m (from RM8.2m) after accounting for weaker revenue from Vietnam and Malaysia due to the slower demand. Subsequently, we introduce our FY20E CNP of RM1.4m.

Maintain UNDERPERFORM call on WTHORSE with lower TP of RM1.15 (from RM1.20) based on unchanged 0.40x Fwd. PBV pegged to lower FY19E BV/share of RM2.87 (from RM3.02). Our valuation is below the current trough level of 0.5x, which we believe is justified due to the followings; (i) we expect further de-rating in light of further losses, which would erode its book value, (ii) WTHORSE registered the fourth quarterly losses since 4Q17, (iii) the subdued property market suppressing demand for tiles, and (iv) potentially more write-downs in inventories from slow moving goods.

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

Source: Kenanga Research - 1 Mar 2019