|Current Price||RM 1.91|
|Target Price||RM 2.37|
|Market Cap||RM 268m (as of 24/02/17)|
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.
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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