• Stay SELL with new TP of MYR0.83 from MYR0.87, 30% downside – as we roll forward our valuation to FY20F, reflecting 1H19 results that missed. The underwhelming results pointed to Kim Hin Industry’s challenging operating environment domestically, as well as its Australian unit. The soft AUD exacerbated the situation. Looking ahead, with global major economic indicators pointing towards a weakening growth bias, chances for the industry to recover within the next 12 months seem to be fading.

• Weaker than expected. 1H19 core loss of MYR17.8m (ex-impairment of MYR1m on PPE) was below our expectations (our previous full-year forecast was MYR18m losses). This was despite 1H19 topline of MYR180m, which came in in line (-8% YoY at MYR180m). The wider losses were due to a steep drop in gross margin from 28.8% to 22.4% partly from lower volume, thereby increasing per unit production cost; relatively sticky administrative expenses (+5% YoY to MYR37m); and tax expenses of MYR1.4m despite registering losses at group level. The QoQ improvement in its topline (+14% to MYR96m) was an indication of normalisation of the construction sector’s activities, which are typically slower in 1Q due to the festive season. Profitability gauge in the latest quarter continued to weaken – gross margin was 21.3% vs 23.6% in 1Q – with the third consecutive quarter reading also currently below 25%.

• Pushing back expectations for a sector recovery. We initially expected recovery to take place towards end of this financial year. Still, with the industry remaining well supplied and the soft economic outlook, the recovery phase is now unlikely to happen in the near-term. Post results, we cut our earnings forecasts for FY19-21 by 13-233%, and we are now expecting FY20F to register losses – instead of minimal profit.

• Still a SELL with lower TP of MYR0.83. We roll forward our valuation to FY20F based on P/BV of 0.28x (BVPS: MYR2.97), or -2SD from its 10-year historical mean – justifiable given the weak state of the industry, and expectations that the company would stay in red in FY20.

• Key upside risks: A strengthening AUD/MYR, protection measures introduced by the Government to safeguard the industry from import competition, better Australian property market (supported by its affordable housing segment), and new demand from the US as a result of the import tariffs imposed on Chinese ceramic tiles.

Source: RHB Securities Research - 26 Aug 2019