What’s New

2QFY20 earnings missed expectation. Perstima (PER) reported 2QFY20 earnings of RM8.3m (-32% y-o-y, -28% qo-q). The y-o-y decline in earnings was mainly due to (1) lower revenue (-11.6% y-o-y), and (2) lower 2QFY20 gross profit (GP) margin of 6.1% (1QFY20: 8.3%). The group’s 1HFY20 earnings only accounted for 45% of our full-year forecast, which we deem to be below expectations.

Malaysia operations remain challenging. For Malaysia operations, the group reported a PBT of RM6.5m (-41% y-oy) on the back of lower revenue of RM16.4m (-12% y-o-y). We understand that the lower revenue was due to lower sales volume despite higher average selling price. The y-o-y decline in earnings arose from both lower revenue and reduced profit margin.

Vietnam operations supported by higher profit margin. For its Vietnam business, revenue dropped by 9% y-o-y to RM79.1m due to lower sales volume. Nonetheless, its PBT was flattish y-o-y at RM4.5m, supported by higher PBT margin of 5.7% (1QFY19: 5.1%).

Cut earnings estimates by 4%-10%. In view of the lowerthan-expected quarterly results reported and its persistently challenging outlook, we cut our FY20/21/22 earnings estimates by 10%/5%/4%, mainly to account for lower revenue and GP margin assumptions.

Outlook

Still a challenging environment. We expect the operating environment to remain challenging and competitive. The expiry of anti-dumping duties since late 2018, volatility of the ringgit against the US dollar (USD) and increased overseas imports are expected to continue impacting the group’s growth and profitability.

Valuation and Recommendation

Maintain HOLD with lower TP of RM4.65 TP. Post earnings revisions, we maintain our HOLD recommendation for the group with a lower target price (TP) of RM4.65 (vs. RM5.20 previously), pegged to 12x FY20 PE – close to its historical 5- year mean.

Source: Alliance Research - 31 Oct 2019