MY ER Kim Hin Industry Berhad – Feb 2017

Stock Code 5371.KL
Investment Rating BUY
Current  Price RM 1.91
Target Price RM 2.37
Estimated Return +23.9%
Market Cap RM 268m (as of 24/02/17)

Company Profile:
Kim Hin Industry Berhad is an investment holding company engages in the production of Ceramic Tiles, Glazed Decorative Floor, Monoporosa Wall Tiles and Heavy Duty Homogenenous Tiles. Operating in Malaysia, China, Australia and Vietnam.

Investment Considerations:

1) Favourable growth prospects underpinned by Australia’s potential growth
Shifting its revenue base toward Australian market has reduced the reliance on slower domestic growth. Malaysia’s top line grew by 10.3% in 2015 and slow to 5.3% in 2016, reflecting a challenging trading environment. With the acquisition of Australian building products distributors in Sept 2016, the management is confident on doubling the export to Australia in the next few years. Australia’s revenue has increased 67.6% in FY16 (unaudited), and we are projecting FY17 revenue growth to be 15.7% driven by Australian and Vietnam operations.

2) Rising cost is a major pressure point in near-term
Kim Hin has three factories in Malaysia (2), and China (1), the increase in production and operating costs were recently seen in Malaysia on the back of oil price recovery after OPEC-led oil production cut. Feb 17, the Petrol price was raised by c. 10% which many industries will find it hard to digest and finding ways to pass the costs to consumers, resulting in a rise in inflationary pressure. Management has said that fuel expenditure makes up 35% of plant’s operational cost. We raised our estimation (FY17) for production costs and operating expenses by 2.2% and 6.7% respectively.

3) Increased borrowings and comfortable leverage
Although not necessary given its net cash position of RM28m and cash flow positive, the leverage has no immediate credit risk. Current Debt / EBITDA at 0.7x and Interest Coverage at 36x. High liquidity as evidenced by acid test ratio of 1.8x (FY15: 2.5x).

4) Making allowances for potential acquisitions
We are under the impression that management may engage in acquisitive growth strategy. The management plans to open a third production line in Peninsular Malaysia to make up for the shortfall in Kuching’s gradual production scale down. Production capacity is set to grow in short to medium terms.

4) Revising our valuation assumptions
Our previous assumptions did not consider the growth potential after the acquisition of Australian distribution centres. We have revised the target price to RM 2.37 from RM 2.06, implying an upside potential of 23.9%. Upgrade the rating from NEUTRAL to BUY. The risks to our BUY recommendation are discussed later.

Financial Summary FY 12 FY 13 FY 14 FY 15 FY 16
Price to Earnings 80.02x 137.85x 6.39x 8.96x 7.88x
Price to Net Tangible Assets 0.43x 0.39x 0.35x 0.63x 0.50x
Price to FCF n/a n/a 10.08x 10.77x n/a
EV / EBITDA 11.28x 8.04x 3.79x 5.51x 5.05x
Net Profit Margin (in %) 0.99 0.49 8.24 9.72 8.08
Free Cash Flow RM’m -6.5 -25.7 16.4 29.7 -14.1

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2 thoughts on “MY ER Kim Hin Industry Berhad – Feb 2017

  1. My name is Ben Gan. I am a veteran investor mainly in Bursa, and to a smaller extent in SGX and US. I find your analysis in stocks easy to understand, useful and spot-on. Kim has done well in the last 6 months. Its earnings per share of 19.07 sen compared to the previous year’s corresponding period of only 9.63 sen are commendable. I believe this great improvement is because of the acquisitions made some few months back. I am glad to have found your blog. Please keep up your good work. TQVM

    1. Dear Ben,

      We do not get paid for our research (and hard-work) so we really appreciate your kind words. We hope to produce excellent research and helping the investors to understand more of small-cap stocks that do not generate enough attention from sell-side institutions. We are expanding our coverage in the near future, be sure to come back for more.

      Thanks and kind regards.

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