A Detailed Investment Research On Kim Hin Industry Berhad

Kim Hin Industry Berhad 
Industrial Product | Ceramic Tiles 
Stock Code: 5371.KL Malaysia 

BUY 

Current Price RM 1.69
Target Price RM 2.06
Est. Upside Potential 22.1%
Market Cap RM 237.00m
52-week Range RM 1.58 – RM 2.60
Average Volume* 43,270
Shares Outstanding 140,239,000
Free float 38.50%
Beta 0.73

Valuation Basis DCF model

* Source: FT.com

Investment Considerations

1) Heightened capital expenditure dragged down its cash flow but positive in the long run.

Although the acquisition weakened several metrics such as cash flow and interest coverage, making the comparable momentarily meaningless, but it provides longer term economic benefits. It has been reported that the acquisition would raise the production by 75% result in higher revenue and profit generation.

Current Seremban’s annual capacity is 4 million square meter which would be boosted up by 3 million square meter of glazed ceramic wall and floor tiles. They also reported to boost Shanghai’s production by 25%. We expect the capital expenditure spending would remain heightened in short to medium term as it attempts to expand production. Well positioned to take advantage of potential economic recovery in the region.

2) Sudden spike in operating costs is a concern but growth potential is underappreciated by the market.

The main contributors for deteriorated profit margin were due to 1) the sudden spike in goods and operating costs in Q1 2016 (range from 6% to 29%), 2) unfavourable exchange rate (which the company reported to hedge 20% of its sales in 2015 and did not report on the hedging strategy on its costs), 3) loss on fair value of financial assets. Other expenses reported of RM 8.3million in Q1 2016, increased from RM 0.9 million compared to Q1 2015. Such expenses are not reported as part of the core operating cost hence it may not be recurring in nature hence temporarily dragged down the profit in FY 2016. It is supported by favourable growth prospect which we expect the profit generation to be much higher once the plants start to operate.

3) The sharp drop in share price provides a good opportunity to accumulate at lower price.

Current valuation is close to 52-week low and the P/E multiple is the lowest among the peers. EV / EBITDA of 5.80x which we expect it will elevated to approx. 7x by FY2016 due to its lower EBITDA margin. Based on Discounted Cash Flow Model, our result suggests that a target price of RM 2.06, a 22.1% upside potential.

The investment risks are discussed in the valuation section.

More Detailed Report

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  KimHin

Investment Research Disclaimers 

• The opinions and views expressed in this report are solely of the analyst.
• Any projections or estimations may not be accurate. Market conditions and assumptions could result in materially different outcomes.
• Past performance is not necessarily an indicative of future performance and the analyst will not accept for any loss arising from information contained in this report.
• This report is not intended as an offer to buy or sell the securities discussed.
• Seek independent advice to understand the investment risk arising from taking investment actions based on this report. Consider your unique circumstances (such as time horizon, liquidity and risk tolerance) before investing as not all investment are suitable for every investor.
• The analyst currently has no financial interests with the company analysed in this report. The company has not paid the analyst to write this research.
• The analyst currently has no shareholding in the company analysed in this report.
• The analyst may invest in the company analysed in the future but will only do so after 48 hours of publishing of this report.

This research is provided by Jackson Yuen, a credit analyst at the Bank of East Asia. He is passionate about credit analysis and equity research. He is currently analysing listed companies in Malaysia to provide Malaysian investors with more comprehensive analysis. Due to the nature of his work, he focuses heavily on the cash flow generation and the sustainability of the capital structure. Please visit his website.