• Still SELL, with new MYR0.76 TP from MYR0.81, 27% downside. Chin Well’s FY24 (Jun) results disappointed with weaker-than-expected topline and margin compression due to the loss of economies of scale and higher input costs. We cut our forecasts accordingly to reflect the softer numbers and persistently weak demand outlook. Current valuation (+1SD above the mean) remains lofty, and we believe the share price has yet to fully reflect the challenges ahead.

• FY24 results were below expectations. Core net profit of MYR8.3m (-78% YoY) met only 73% and 79% of our and consensus estimates. The lower-than- expected revenue and EBITDA margin led to the underperformance. Note that we stripped off the unrealised FX gain of MYR0.8m to arrive at the core profit. Geographically, revenue weaknesses in Malaysia (-32% YoY), North America (-33% YoY), and Europe (-21% YoY) were partially cushioned by improved sales in Asian countries (+22% YoY). DPS of 1.76sen (FY23: 5.51sen) was declared and will go ex on 24 Oct.

• Results review. YoY, FY24 revenue fell 17.7% to MYR343.7m, dragged down by fasteners (-25.1%) and wire products (-23.4%) segments. The weakness was attributed to softening of sales volumes and ASPs for its products, amid continuing uncertainties of global macroeconomic conditions. FY24 EBITDA margin contracted 8.2ppts to 4.6% on the loss of economies of scale and higher input costs. QoQ, 4QFY24 revenue rose 17.7% given the gradual sales recovery from European markets, as well as uptick in seasonality. Correspondingly, core earnings rose 202.4% QoQ to MYR3.5m.

• Outlook. Management anticipates a challenging outlook in its key markets, citing ongoing wars, escalating US-China tensions, and a potential recession in key markets as factors that have negatively impacted economic sentiment, leading to lower infrastructure spending. These challenges have dampened the demand for fasteners, and the strengthening of the MYR has further pressured export earnings. With soft sales volumes expected, we expect Chin Well to face continued margin compression from diseconomies of scale and negative operating leverage. Looking ahead, FY25F could see a gradual recovery in volume as customer inventory adjustments taper off. The group is also exploring opportunities to diversify its client portfolio and expand beyond its current export markets.

• Forecast and ratings. We cut FY25F-26F earnings by 6% and 4% – accounting for the prolonged demand weakness and loss of economies of scale, while introducing FY27F earnings (+15%). Our TP is lowered to MYR0.76 – based on an unchanged 8x P/E (in-line with its mean) – and includes a 14% ESG discount from its 2.3 ESG score which is below the country median. Key upside risks: Higher-than-expected sales volumes, better-than-expected margins, and reduced competition intensity.

Source: RHB Research - 2 Sep 2024