White Horse Bhd
(May 24, RM1.86)
Maintain market perform with a lower target price (TP) of RM1.75: White Horse Bhd’s core net loss (CNL) for its first quarter of financial year 2018 (1QFY18) ended March 31, 2018 of RM4.2 million missed our/consensus estimates of RM13 million/RM12 million due to lower-than-expected tile demand in Malaysia and Vietnam, leading to lower-than-expected revenue. No dividend was declared as expected. We derive our CNL estimate after reversing out unrealised foreign exchange gain of RM8 million.

White Horse’s 1QFY18 CNL of RM4.2 million narrowed quarter-on-quarter (from 4QFY17 CNL of RM8.1 million) despite the lower revenue (-14%) due to the absence of inventory write-off suffered in 4QFY17 (write-off of about RM20 million). 1QFY18 CNL was down from a core net profit position of RM1.1 million year-on-year (y-o-y) despite revenue being relatively flat because total group earnings before interest, taxes, depreciation and amortisation (Ebitda) margin contracted by three percentage points. The y-o-y contraction of the Ebitda margin was a combination of weaker average selling price (ASP) due to stiffer competition and higher operating costs such as natural gas.

For FY18, we believe prospects for the tile industry will remain challenging due to rising cost pressure such as hike in natural gas and labour costs (minimum wage review in FY18), weak tile demand owing to the subdued property market, and increasing competition from local importers given that the ringgit has strengthened against the US dollar, providing wider import opportunities for local traders.

We cut our FY18/FY19 earnings estimates by 48%/42% to RM6.7 million/RM9.5 million, respectively, after accounting for weaker plant utilisation and weaker ASPs in view of the slower industry demand leading to stiffer competition. We maintain “market perform” with a lower TP of RM1.75 (from RM1.80) based on an unchanged FY18 price-to-book value (PBV) of 0.56 times post earnings cut. We believe our 0.56 times PBV valuation is fair as we remain cautious due to the subdued property market which would suppress demand for tiles, potential write-down in inventory, and rising energy (natural gas) and labour costs, which make up a substantial portion of operating costs at about 40%. — Kenanga Research, May 24