Downgrade to SELL from Neutral with a lower MYR1 TP from MYR1.33, expected total return: -25%. While 1H18 revenue met 45% of our estimates, the still-challenging domestic operating environment – due to keen competition – continues to drag Kim Hin’s overall financial performance. It also pushed the firm into a net loss of MYR10.4m. Operating conditions in the coming quarters are not likely to improve much. Management’s focus is very much centred on preserving the firm’s financial position and cash flows – which are still in positive territory. We now expect Kim Hin to record a full-year loss for FY18 before starting to see some improvements from FY19 onwards. As the industry’s challenging operating environment is still not showing signs of turning around, we revise our P/BV lower to 0.28x from 0.35x – which is -2SD over its 10-year mean – while rolling our valuation base year to FY19 (BVPS: MYR3.56).

Numbers still weak. Kim Hin Industry posted a 1H18 revenue decline of 1% to MYR196m. This lack of topline growth was primarily on stagnating domestic demand – near flat at MYR89m and accounting for 45% of total revenue – as a result of the soft state of the local property market. Overseas sales were also not as strong as we envisaged: Kim Hin posted a 2% decline to MYR107m, largely on a weak performance in China (circa -15% YoY to MYR28m). Bottomline for this period dipped to a net loss of MYR10.4m, largely on margins contraction, unfavourable FX movements, and lower other income.

By geography, domestic operations were particularly weak, as the firm registered a net loss of MYR11.8m (previous year: MYR3.1m). Kim Hin’s overseas operations – largely driven by Australia (40% of total revenue) and China (14% of total topline) – saw earnings dropping to MYR1.4m from MYR5.5m. QoQ, revenue declined marginally by 2% to MYR97m, as the sole drop in the domestic market (-6% QoQ at MYR43m) offset its overseas markets’ organic improvements, which – on combined basis – rose 2% to MYR54m. A net loss of MYR5.1m was recorded (1Q18: MYR5.4m).

Forecasts cut. Given the weak set of 1H18 results and a 2H that is not expected to see any significant improvements – given the still very competitive domestic business environment – we are now expecting FY18 to end in losses. For FY19-20, we lower our earnings estimates by 72% and 65%.

Downgrade to SELL from Neutral with a new MYR1 from MYR1.33, total expected return: -25%. While Kim Hin’s operating cash flows (1H18: MYR8m) and balance sheet (net cash: MYR37m) remain healthy – even with the weakness in the headline figures – there are no clear indications that its earnings trajectory will improve in the near term. Reflecting this, we revise our P/BV to 0.28x from 0.35x – which is -2SD over its 10 year mean – while rolling our valuation base year to FY19 (BVPS: MYR3.56).

Source: RHB Securities Research - 29 Aug 2018