Review

• Excluding the one-off expenses of RM0.9mn, CHINWEL’s 9MFY24 core net profit of RM6.3m disappointed, accounting for only 41.7% and 36.4% of ours and the street’s full-year estimates, respectively. The disappointment was largely due to weaker-than-expected export volumes and persistently subdued demand for steel products.

• YoY, 9MFY24 core net profit plummeted by 80.4%, along with a revenue contraction of 31.2%. The downturn in earnings was chiefly due to the following: - (i) reduced demand across European markets, coupled with a drop in the average selling price (ASP), (ii) lower sales volumes resulting from slowed export activities and ongoing market uncertainties.

• QoQ, 3QFY24 revenue declined by 3.1%, primarily due to reduced export activities leading to lower sales volume. However, the core profit surged threefold to RM1.8mn, driven by a decrease in the effective tax rate.

Impact

• Considering the weaker-than-expected results, we cut our FY24/25/26F earnings forecasts by 34.3%/38.7%/29.7%, respectively, after revising our ASP assumptions lower for certain fasteners and lower sales volume for the wire products.

Outlook

• The group's prospects for the next few quarters are shrouded in uncertainty. Global economic sentiment has been negatively affected by several factors: the Israel-Hamas conflict, the ongoing Ukraine-Russia war, increasing US-China tensions, and the looming threat of a recession in major markets. As a result, global demand for fastener products has weakened. Nonetheless, we are cautiously optimistic for a gradual recovery, fuelled by the expected revival of mega infrastructure projects in Malaysia.

Valuation

• Following the revised earnings forecasts, we lower our target price from RM1.11 to RM0.74, based on an unchanged target PER of 9x CY25 earnings. Maintain Sell on the stock.

Source: TA Research - 30 May 2024