FY19 CNL of RM41.9m came in within our (101%) but below consensus expectations at 107% of estimates. No dividend was announced as expected. Upgrade to MP with higher TP of RM0.970 (from RM0.95) based on 0.40x Fwd. PBV pegged to FY20E BV/share of RM2.43.

Within expectations. Excluding one-off gain on disposal of PPE (RM0.6m), write-down of inventory (RM10.5m) and impairment of PPE (RM12.1m), FY19 CNL of RM41.9m came within our at 101%, but below consensus at 107%, of estimates. No dividend was announced as expected.

Results’ highlight. YoY, FY19 CNL further deteriorated to RM41.9m (+92%), compared to RM21.8m in FY18, mainly due to: (i) lower revenue contribution by 13%, caused by poor tiles demand from both local and oversea markets (Malaysia and Vietnam sales dropped by 14% and 8%, respectively), (ii) widened loss margin to 15% (from 4% in FY18) largely due to higher production and operation costs. QoQ, 4QFY19 recorded lower CNL of RM9.1m (-37%) mainly due to increase in revenue by 11% compared to the preceding quarter as the company usually has higher turnover at the year end.

Outlook. WTHORSE’s business terrain 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 which heavily relies on construction, property development and renovation industries, which are currently undergoing slower growth amid a challenging business environment. However, we are positive on the liquidation of PT. WH Ceramic Indonesia, a wholly-owned subsidiary of the company, as we believe the discontinuation of the subsidiary will contribute positively to the company’s results.

Earnings estimate. Post results, we maintain FY20E CNL of RM43.3m and introduce FY21E revenue of RM528.4m and CNL of RM35.8m based on slightly higher margin assumption in view of cost saving measures taken by the company.

Upgrade to MARKET PERFORM with higher Target Price of RM0.970 (from RM0.95) based on unchanged 0.40x Fwd. PBV (which is at the current trough level) pegged to unchanged FY20E BV/share of RM2.43. We believe this is justified due to the followings; (i) the company has been in loss-making position since 2QFY18, and (ii) slower pace in the construction and property development sectors.

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

Source: Kenanga Research - 28 Feb 2020