Saturday 10 September 2016

Quarterly Result Commentary - Kim Hin Industry Berhad

Since the release of Q2 2016 result, the market has been reacted negatively as expected but there is no sign of oversold at the moment. Checking through the quarterly report, here are some key takeaways:

Negatives:

- Kim Hin has tough time growing its bottom line as reflected by gross profit margin deteriorated from 34% to c. 30% in recent quarter which maybe associated with surge in fuel price. 
- Leverage, surprisingly, increased due to bank borrowings (increase by around RM20m) which is still within acceptable range. Debt / EBITDA increased from 0.2x to 0.63x (approximately) which is still consider low. We are of the opinion that leverage below 3x is acceptable.
- Most investors must have noticed that the negative movements in FX eroded much of its profit in previous quarter. But recent spike in MYR has made a small translation gain. FX movements still remain a factor which cannot be fully mitigate.
- Although we expect the Capex remains heightened in short to medium term, Q2 2016 showed that the increase in Capex is beyond our expectation. Further RM20m+ was spent in addition to the previous quarter's expenditure. With some funding coming from disposal of assets and bank debt. We remain optimistic that the Capex might payoff in the future with its expansion plan. Temporarily weakening cash flow metrics is not a major concern given its cash holding of RM59m against RM52m current liabilities and low leverage.
- Non core operating expense dragged its profit down which there was no break down or information. Nevertheless, we believe some costs are not recurring in nature due to its treatment under other expenses rather than in core expenses.


Positives:

- SG&A slightly reduced from 23.7% to 23.4% which reflects better operational efficiency. However, it is still far from offsetting the surge in cost of sales.
- Segment analysis shows that the company is very successfully growing its top line but not its bottom line. Noticeable growth in China, Australia and Vietnam but dragged down by sluggish domestic demand. 
- Bottom line result for Vietnam has been positive with loss narrowing. We believe that Vietnam unit is on track and as our expectation, it could be a profit contributor by 2017.


Overall, reduced margin combined with non operating expenses have reduced the bottom line result, our model has reflected weakening cash flow generation. To recap, we recognise the need to be pessimistic hence we have incorporated worst case scenario which shows that the value may be around RM1.50 (worst case). Outlook is positive due to its growth prospects (which at the moment, top line growth seems to be on track with disappointing bottom line result). However, we will continue to pay attention to its upcoming financials to look out for any material adverse change in cash flow generation and profit margins.



Feel free to comment and contact me with any contradictory views.


Thanks and Happy Trading,


KapitalWise



Disclaimer: the views above are opinions based on facts and subjective judgements. We do not take any responsibility for any actions rely on the information discussed.






4 comments:

  1. What do u think of IQ group ?

    ReplyDelete
    Replies
    1. Hi, unfortunately I do not think within the comment section I can analyse much of the company. I may consider covering it next. Thanks.

      Delete
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