New markets could help White Horse keep production levels up

TheEdge Mon, Apr 15, 2019 10:30am - 4 years View Original


White Horse Bhd
(April 12, RM1.16)
Maintain market perform with unchanged target price (TP) of RM1.15.
Our sensitivity analysis indicates that lowering average selling prices (ASPs) have higher sensitivity than scaling down production.

 
For White Horse to return to the black in the 2019 financial year (FY19), assuming other operating costs are maintained, it requires at least 76% utilisation rate. This can potentially be achieved by: (i) exploring other export markets, (ii) diversifying into other businesses, and (iii) rationalising cost. No changes in FY19-FY20E earnings. Maintain “market perform” and TP of RM1.15.

Year-on-year (y-o-y), FY18 registered a core net loss (CNL) of RM23.7 million from a core net profit (CNP) of RM5.4 million, as revenue declined (-5%), weighed by lower sales from both its Malaysia and Vietnam operations.

This is owing to weaker tile demand dragged down by slower construction activities in the residential space, exacerbated by stiff pricing competition that led to margin erosions. Quarter-on-quarter (q-o-q), the fourth quarter of financial year 2018 (4QFY18) CNL of RM21.7 million widened vis-à-vis CNL of RM1.1 million in 3QFY18 mainly due to higher operating expenses attributed to the price hike in natural gas deteriorating its profitability.

White Horse’s markets are mainly concentrated in Malaysia and Vietnam with core operations, including manufacturing and distribution activities. Based on its FY16 sales, Malaysia makes up 72%, Vietnam 18%, and other regions 10%. For its Malaysian operations, we reckon the poor performance in FY18 sales revenue was due to the weaker property market and the highly competitive market. We estimate a current capacity utilisation rate to be at 70% compared to the highs of 84% back in 2014.

Our sensitivity analysis indicates that, with every decline in capacity utilisation by 4 percentage points to 66%, FY19E CNL will widen by 68%.

On the other hand, assuming current utilisation rate being kept constant, should White Horse opt for clearance of stocks by discounting ASP by 4%, its FY19E CNL would expand significantly by 128%.

This implies lowering ASPs have higher sensitivity than scaling down production. Given product prices are already at lows owing to excess supply and intense competitions in the market, we believe the company is unable to afford further cuts in product prices as it will adversely impact the group margins.

It may be better-off for it to find new markets to penetrate in order to keep production levels up. However, if the group does not find new avenues to clear inventories, we believe the group may have no choice but to continue with current production levels while lowering ASPs to clear inventories, which will be very detrimental to earnings but exerting less strain on its cash flow.

Maintain “market perform” with an unchanged TP of RM1.15 based on 0.4 times forward price-to-book value pegged at FY19E book value (BV) a share of RM2.87. Our valuation is below the current trough level of 0.5 times, which we believe is justified due to the following: (i) earnings risks loom amid a tough market environment given that White Horse had registered fourth quarterly losses since 4QFY17, (ii) the subdued property market suppressing demand for tiles, and (iii) potentially more write-downs in inventories from slow moving goods.

Risks to our call include sharp rises and/or declines in ASPs and production volumes. — Kenanga Research, April 12

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