1QFY20 CNL of RM13.6m came in below our/consensus’ estimate at 31%/34%, due to lower-than-expected sales and profit margin. No dividend was announced as expected. Given the sharp price weakness, upgrade to MP with lower TP of RM0.740 (from RM0.750) based on 0.31x Fwd. PBV pegged to FY21E BV/share of RM2.39.

Below expectations. Excluding unrealised forex loss (RM6.5m), 1QFY20 CNL of RM13.6m came in below our/consensus’ estimate at 31%/34%, largely due to lower-than-expected sales and profit margin achieved during the quarter which was impacted by early stages of the MCO. No dividend was announced as expected.

Results’ highlight. YoY, 1QFY20 CNL increased drastically to RM13.6m (56%) compared to RM8.7m in 1QFY19, mainly due to: (i) drop in revenue by 25% due to slower market pace in construction industry, (ii) business shutdown in compliance with MCO imposed by the government, and (iii) lower profit margin recorded during the quarter. QoQ, first quarter registered higher losses by 50% compared to RM9.1m in the preceding quarter for the same reason mentioned above.

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 the 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 increased FY20E and FY21E CNL by 24% and 16% to RM53.5m and RM41.4m, respectively, in view of weaker demand and lower profit margin due to the Covid-19 pandemic.

Upgrade to MARKET PERFORM with a lower Target Price of RM0.740 (from RM0.750) based on an unchanged 0.31x Fwd. PBV (which is at the current trough level) pegged to FY21E BV/share of RM2.39. We believe this is justified due to the following; (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 - 25 Jun 2020