• Keep SELL and MYR0.83 TP, -22% expected return. Kim Hin is expected to release its FY19 results towards the end of the month. We are keeping our full year core loss forecast of MYR29.1m and do not expect a dividend payout. Moving into FY20, we forecast a narrower core loss. While the risks are tilting towards the downside, especially for 1Q20 as the coronavirus outbreak may dampen spending sentiment, we keep our FY20 numbers on the assumption of pent-up demand in subsequent quarters.

• 4Q19 still in losses. 4Q19 core earnings are expected to remain in the red at MYR5.3m, narrower than the previous quarter’s MYR6.1m – bringing full year core losses to the tune of MYR29.1m vs MYR34.3m in FY18. While operating cashflow is expected to end in positive territory (9MFY19: MYR11m) and the balance sheet to stay in net cash position, as it continues to adopt a defensive business strategy, we are not expecting the company to declare dividends for the fiscal year.

• 1Q20 likely to be soft. Kim Hin’s tiles manufacturing plant operations in Shanghai have been affected by the coronavirus outbreak as the Chinese Government has instituted stringent quarantine measures – although this is partially mitigated by its inventory management. Additionally, 1Q20 demand would be softer for the same reason. However, this should be offset by the potential pent-up demand in the coming quarters should the outbreak peak in the near term. Further demand could also come as countries are likely to introduce fiscal stimulus packages to offset the coronavirus drag. Hence, we are keeping our FY20 forecasts for now.

• Maintain SELL with a TP of MYR0.83. We are keeping our P/B-based valuation of 0.28x FY20 BVPS of MYR2.97. Our P/B represents -2SD of the stock’s 10-year historical P/B band as the recent macro picture continues to put pressure on the industry, which is experiencing both excess supply and soft demand, to stage a recovery.

• 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 - 12 Feb 2020