Review

• Excluding a net exceptional loss amounting to RM1.3mn, CHINWEL’s 1QFY24 core profit of RM3.9mn came in below expectations, accounting for 8.6% and 9.2% of our and consensus full-year estimates. The variance was mainly due to lower-than-expected profit contributions from fasteners and wire divisions.

• YoY, 1QFY24 core profit dropped 82.8% to RM3.9mn as revenue was 47.4% lower at RM83.8mn. Both fasteners and wire divisions dragged the earnings performance. The PBT for the fasteners division fell by 89.2% to RM3.5mn from RM32.4mn, mainly due to lower average selling prices and weak demand globally. On the other hand, the wire division sank into the red by posting an LBT of RM0.3mn compared to a PBT of RM1.6mn a year earlier due to lower revenue as a result of weak global sentiment.

• QoQ, 1QFY24 core profit jumped 899.7% to RM3.9mn although revenue was 12.4% lower at RM83.8mn. The stronger bottom line was mainly due to the low base effect and lower cost of sales.

Impact

• Following the weaker-than-expected results, adjustments are made to reflect lower average selling price assumptions for certain fasteners and lower sales volume for the wire products. Consequently, earnings forecasts for FY24/FY25/FY26 were cut by 14.3%/4.3%/7.1%, respectively.

Outlook

• Overall, we expect the weak export sales will be cushioned by stronger domestic demand in the upcoming quarters in tandem with the increasing demand from the construction and industrial sectors. Meanwhile, the group intends to increase its distribution network further in both the European and US markets to capitalise on the trade diversion opportunity.

Valuation

• After revising the earnings forecasts, we tweaked the target price lower from RM1.54 to RM1.41, based on unchanged 9x CY24 earnings. Maintain a Hold call on the stock.

Source: TA Research - 30 Nov 2023