1H19 CNL of RM18.4m missed both our and consensus’ CNL estimates of RM9.2m and RM9.7m, respectively, largely due to weaker-than-expected revenue and CNP margin. No dividend was announced as expected. Downgrade to UP with a lower TP of RM1.00 (from RM1.15) based on the unchanged 0.40x Fwd. PBV pegged to lower FY20E BV/share of RM2.49 (from RM2.87).

Below expectations. Excluding one-off unrealised forex gain (RM0.2m), loss of disposal of PPE (RM0.4m) and write-down of inventory (RM0.04m), 1H19 CNL of RM18.4m missed both our and consensus’ CNL estimates of RM9.2m and RM9.7m, respectively. This was mainly due to lower-than-expected tiles demand in both Malaysia and Vietnam, coupled with weaker-than-expected ASPs and higher-than-expected production and operating cost. No dividend was announced as expected.

Results highlight. YoY, 1H19 CNL widened drastically to RM18.4m, compared to RM0.9 in 1H18, mainly due to: (i) lower revenue contribution by 12% caused by poor tiles demand from both local and oversea market (Malaysia and Vietnam’s sales dropped by 12% and 24%, respectively), (ii) lower GP margin to 11% (from 17% in 1H18) and huge drop in EBIT margin from 2% in 1H18 to losses (-7%) in 1H19 largely due to higher production and operation costs. QoQ, 2Q19 recorded higher CNL of RM9.6m (+10%) due largely to margins deteriorating significantly (-13%) but partly offset by slight improvement in revenue to RM128.2m (+1%).

Outlook. WTHORSE’s business operation remains challenging due to stiff market competition, high production and operation costs, fluctuation in foreign currencies and pricing strategy. Moving forward, we remain cautious over the company’s outlook as the business operation heavily relies on construction, property development and renovation industries, where the industries are currently undergoing slower growth and challenging business environment.

Earnings estimate. Post results, we widen our FY19E and FY20E CNL estimates to RM35.3-35.9m (from CNL of RM9.2m and CNP of RM1.4m, respectively) in view of weaker sales generated from both local and oversea markets due to stiff competition, challenges and slow market pace in both construction and property development industries, as well as higher production costs.

Downgrade to UNDERPERFORM with a lower Target Price of RM1.00 (from MARKET PERFORM; TP: RM1.15) based on the unchanged 0.40x Fwd. PBV pegged to lower FY20E BV/share of RM2.49 (from RM2.87). Our valuation is below the current trough level of 0.5x, which we believe is justified due to the followings; (i) the company has recorded losses for five consecutive quarters since 2Q18, (ii) slower pace in construction and property development, and (iii) widening losses from rising production costs.

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

Source: Kenanga Research - 26 Aug 2019