• Maintain SELL with a new TP of MYR0.68 from MYR0.83, -10.5% expected return. COVID-19 is exerting further pressure on the domestic tiles industry, which was already experiencing imbalances prior to the pandemic. The Movement Control Order (MCO) relaxation is not expected to drive demand back to pre-pandemic levels quickly due to the damage inflicted on the job market. Our revised forecasts mean Kim Hin would record deeper core losses in FY20, and profit is not expected to return until FY22.

• Expecting deeper losses in 1Q20. COVID-19 is expected to impact the company in terms of both production and reduced demand from its end customers. We expect the company to register core losses north of MYR6m in 1Q, given that its operations have been interrupted for most the quarter. The company has a tiles manufacturing plant in Shanghai, China, which was affected by the lockdown imposed by China’s Government during 1Q. While operating cashflow surplus may come under pressure, we are still expecting the company to run a net cash balance sheet – largely through working capital adjustment. No dividend is expected to be declared for FY20 and FY21.

• Proposed relocation for portion of land and buildings erected thereon. The relocation exercise is not completed yet as the reconstruction of the replacement buildings and related facilities are still ongoing. Recall that the relocation deal was entered by its 79.5%-owned subsidiary with the Shanghai local government authority for a total consideration of MYR35.8m. Post deal, a one-off gain is expected to be booked, and this would also provide a boost to its cashflow.

• Earnings revised lower. Earnings for 1Q and 2Q are expected to be under pressure as the full resumption of property construction activities is still in progress. Looking ahead, on the back of the challenging macro environment, our property sector analyst expects new sales for listed property players for this year to decline by 40-50%, while a rebound for next year is not expected to be particularly strong at 10% – hence tiles demand for FY21-22 is expected to remain soft. Consequently, we lowered our earnings forecasts for FY20-22 by 294%, 472% and 15% respectively.

• Remain SELL with lower TP of MYR0.68 based on P/B valuation of 0.25x FY20 BVPS of MYR2.73. Our P/B is around -2.5SD of the stock’s 10-year historical P/B band – a reflection of the challenging industry outlook.

Source: RHB Securities Research - 5 Jun 2020