Quarterly Result (Malaysia) – Kim Hin Berhad (Q3 FY16)

Last Traded Price RM 1.84
Previous Price* RM 1.69
Target Price* RM 2.06
Rating* BUY (maintained)
Price to Earnings** 15.36x
Price to Cash Flow** 5.96x
Price to Book** 0.53x

* As of 10/08/16
** As of 04/12/16 (Source: Morningstar)

Robust growth in Q3 with top line result grew by 10.3% and net profit by 43.1% (compared to the previous Q3). The quarterly result is much more positive than our expectation but worth pointing out that based on 9 months results, the net profit is still 42% lower. The outlook, although, is quite promising with good growth prospects underpinned by the expansion in capacity (through acquisition and attempt to diversify into Australian markets), it exhibits risks of any adverse change in consumptions.

Negative observations from the quarterly report:
1) Our baseline estimate for capital expenditure (Capex) is RM 49m for FY16 (excluding the acquisitions) and YTD, the total Capex is RM 40.3m. The acquisitions of investments and subsidiaries were RM 36m over nine months period which is beyond our tolerance and expectation hence constrained its cash flow generation.

2) Its growth prospect has resulted in the higher working capital which has seen an increase of RM14.4m compared to RM9.6m. However, the impact on cash flow generation is limited.

3) The increase in borrowings is beyond our estimation which could be attributable to the funding need arising from the acquisition. The increase is within our tolerance.

4) Slight increase in financing costs, SG&A and effective tax expense but were immaterial.

Positive observations from the quarterly report:
1) Need
not to mention, the Q3 bottom line earnings are better than our expectation albeit much lower compared to 9 months data (-42%).

2) Previously, we have forecasted that the Vietnam unit will be a profit contributor by FY 17. To our surprise, it materialised earlier than our expectation in Q3. Australia unit also delivered a promising return (although immaterial). The growth prospects could be higher especially with the Ringgit appreciation (FX gains would be another key factor to drive cash flow and earnings which might offset the sluggish domestic trading performance) as Kim Hin focuses on expanding Australian market.

Summary
Cash flow generation is weaker than our assumption due to the unexpected cost of acquisitions and investments which consumed a material amount of cash flow. The justification of exclusion of these expenses is due to non-recurring in nature (usually). The growth potential is underpinned by Australia and Vietnam (perhaps, to some level, through FX gains). As pointed out previous, cash flow metrics are temporary ineffective due to its expansion plans that consumed a high amount of cash. We will see how it will translate those Capex into earnings in the future to support the growth.

Although we remain positive on the company’s outlook, the recent surge in share price implies an upside of 12% (target price: RM 2.06 based on our estimation as of 10/08/16). Please refer to principal investment risks in the equity research report.

 

Disclaimer: The views above are opinions based on facts and subjective judgements. Yield Mountain (including the contributors) does not take any responsibility (be in monetary or non-monetary) for any actions rely on the information discussed.
Valuation will be performed annually. Thus we will update the latest valuation in the next quarter.

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