• We maintain our SELL call with a new TP of MYR0.81 from MYR0.83, representing a total downside risk of 21%. FY19 core loss of MYR29.1m meets our expectations. Looking ahead, we now expect FY20 to see a deeper loss of MYR8.3m vs initial expectations of MYR2.2m on the back of the soft macro environment in 1Q. The financial focus in the coming year would still likely be centered on maintaining positive cashflow and net-cash balance sheet.

• Within expectations. On the back of the soft global macro environment, FY19 revenue fell 6% to MYR379m, with all except its Vietnam operations seeing a decline in revenue. Pricing pressure remains, with gross margins falling from 26% to 24% – reflecting the industry’s overcapacity situation. On the operating costs front, significant distribution and administration costs reductions from MYR154m to MYR128m were achieved. However, headroom for further improvement in FY20 on this front is limited in our view. Stripping out one-off items related to assets impairment amounting to MYR4.8m, FY19 core net loss of MYR29.1m meets our forecast. Despite the soft bottomline performance, operating cashflow was still positive at MYR30m vs MYR17.6m in FY18 – achieved largely through working capital management. Balance sheet remains in net cash position.

• Update on partial land relocation. Progress on the partial relocation of the land used for its manufacturing activities in Shanghai is on schedule. The agreement was entered with the Zhujing Town Relocation, Resettlement and Reconstruction Housing Office. Upon completion of the relocation process, the company would receive proceeds of MYR35.8m. We expect non-core gains to be recognised.

• Numbers are revised down. We are now expecting FY20’s loss to be deeper at MYR8.3m vs our previous loss forecast of MYR2.2m – this largely reflects the expectation that 1Q20’s performance would be significantly weaker. However, subsequent quarters should see a rebound – on the expectation that the COVID-19 outbreak would peak in the near term.

• Maintain SELL with a TP of MYR0.81. We are keeping our P/B (0.28x) based valuation to FY20 (BVPS: MYR2.90). Our P/B represents -2SD of the stock’s 10-year historical P/B band, with prospects for an uplift in the multiple only likely once there are clear signs of a recovery in the sector.

• Key upside risks: A strengthening AUD/MYR, protection measures introduced by the Government to safeguard the industry from import competition, better Australian property market and additional demand as a result of the likely global fiscal stimulus packages to counter COVID-19.

Source: RHB Securities Research - 27 Feb 2020