• 3QFY20 earnings dropped >30% y-o-y, dragged by lower revenue and reduced margin

• Cut earnings estimates by 11%-14%

• The increased competition from imported tinplates continues to cap its growth prospects

• Maintain HOLD with lower TP of RM4.25

What’s New

3QFY20 earnings below expectations. Perstima (PER) reported 3QFY20 earnings of RM6.3m (-38% y-o-y, -24% qo-q). The y-o-y decline in earnings was mainly due to (1) lower revenue (-14% y-o-y), and (2) lower 3QFY20 gross profit (GP) margin of 6.2% (3QFY19: 6.4%). The group’s 9MFY20 earnings only accounted for 66% of our full-year forecast, which we deem to be below expectations.

Malaysia operations – dragged by lower revenue. For its Malaysia operations, the group reported an operating profit of RM6.2m (-62% y-o-y) on the back of lower revenue of RM144.6m (-14% y-o-y). We understand that the lower revenue was due to both lower sales volume and average selling price (ASP). The y-o-y decline in earnings arose from lower revenue and profit margins. For the quarter, the group registered pretax profit margins of 4.0% compared to 5.4% in 3QFY19.

Vietnam operations – challenging operating environment. For its Vietnam business, revenue dropped by 16% y-o-y to RM62m due to both lower sales volume and ASP. Its operating profit dropped by 48% y-o-y to RM2.5m. This was also dragged by lower revenue and profit margins. The Group registered its Philippines subsidiary in November 2018 and incurred losses of RM0.4m for the quarter largely for rental and administration purposes. There was no revenue from the Philippines yet.

Net cash increased q-o-q. For the quarter, the group reduced inventory by 18% q-o-q to RM133m. This resulted in lower borrowings. Net cash increased to RM68m (RM0.69/share). No dividend was declared for this quarter.

Outlook

Still a challenging environment. We expect the operating environment to remain challenging and competitive. The increased competition from overseas imports and volatility of the ringgit against the US dollar (USD) are expected to continue impacting the group’s growth and profitability.

Cut earnings estimates by 11-14%. In view of the lowerthan-expected quarterly results reported and its persistently challenging outlook, we cut our FY20-22 earnings estimates by 11-14% mainly to account for lower revenue and GP margin assumptions.

Valuation and Recommendation

Maintain HOLD with lower TP of RM4.25 TP. Following earnings revision, we maintain our HOLD recommendation for the group with a lower target price (TP) of RM4.25 (vs. RM4.65 previously). We roll forward our valuation base to CY20. Our PE target is pegged to 12x – close to its historical mean.

Source: Alliance Research - 7 Feb 2020