Maintain NEUTRAL, and MYR1.33 TP with expected total return of 6%, based on 0.35x P/BV of FY18F BVPS of MYR3.80, The industry’s overall soft picture has remained unchanged from several quarters ago. This is due to a domestic property sector slowdown and keen competition on a generally well-supplied market from the combination of local production and influx of imported tiles – particularly from China. Rising material costs, mainly energy, is also a challenge. Kim Hin continues to focus on cash flow and balance sheet strength. No significant capex is expected in the near-term, while it explores the possibility of shifting production capacity from Kuching to Senawang, on cost advantage. We keep our earnings forecasts.

2Q is expected to be soft. On the anticipation of the 14th General Election (GE14) in 2Q, domestic demand was affected, as buyers scaled back purchases. This is expected to normalised in 3Q. However, given the domestic property sector’s soft state, we do not expect demand to significantly improve over the next few quarters. On Australian operations, while sales volume was healthy, the weakening of AUD/MYR did not help bottomline – YTD, it averaged at 3.04 vs 3.30 in 2017. On costs, we understand that material costs have been on the rise YTD, with the most recent being the upward revision of natural gas tariffs in Peninsular Malaysia. Overall plant utilisation is 80-90%. Pending 2Q results, we keep our earnings forecasts.

No major capex expected in the near-term. There is no significant capex in the pipeline. Kim Hin Industry is exploring the possibility of moving production line from the Kuching plant to Senawang, via plant expansion of the latter. Despite the recent hike in natural gas prices in Peninsular, they are still cheaper than LPG, which is used at the Kuching plant. We understand that energy cost makes up a significant portion to the overall tiles production cost.

Should this move materialise, it could bring down overall production costs in the medium to long term. In terms of financial risk, management continues to focus on cash flow (1Q operating cash flow was in position despite headline loss) and balance sheet (net cash) strength in navigating through the current soft patch.

Maintain NEUTRAL with MYR1.33 TP, valued at 0.35x P/BV, which is -1SD from its 10-year mean of 0.42x. Without further deterioration to the macroeconomics and/or change in financial market’s risks appetite, we believe this sufficiently reflects the industry’s current operating landscape.

Key risks: Prolonged contraction in demand for tiles, rising competition and unfavorable forex movements.

Source: RHB Securities Research - 25 Jun 2018