PETALING JAYA: While new orders from new clients in the United States are expected to support Kim Hin Industry Bhd’s earnings, weak domestic tile demand will continue to weigh on earnings, according to Affin Hwang Capital.
The research house gathered that the tile manufacturer has secured two new customers from the US following the trade diversion arising from the current US-China trade war. This is expected to support Kim Hin’s earnings in 2020.
“However, we believe earnings prospect remains challenging on the back of the prolonged weak domestic property market and high cost of production,“ it said in a report.
It also gathered from Kim Hin’s management that the new orders account for around 20% of its total domestic production capacity of 14.6 million sq m per year. Orders from the new clients have started on a small scale and should ramp up by early next year.
Currently, it gathered that Kim Hin’s Seremban and Kuching utilisation rates are at 80% and 60%, respectively.
“That said, we remain cautious on the stock as we believe the operating environment remains challenging. This is mainly on the back of weak demand for tiles from the prolonged weak domestic property market. The overhang of unsold properties remains high at 32,810 units (+12% yoy), while housing starts declined by 13% yoy to 47,413 units in the six months of 2019 (1H19).”
Likewise, it said Kim Hin’s overseas operation (Australia, China and Vietnam) reported weak performance in 1H19 with a loss before tax of RM4 million versus pretax profit of RM3 million in 1H18 due to weaker revenue (-14% yoy).
Affin Hwang is maintaining Kim Hin’s 2019-21 earnings as well as its target price of RM1.06. However, the stock has been upgraded to “hold” from “sell” given the limited downside its target price following the 53% fall in the share price from a high of RM2.27 on May 25, 2017.
