White Horse’s operations seen to remain challenging

TheEdge Tue, Aug 27, 2019 10:33am - 4 years View Original


White Horse Bhd
(Aug 26, RM1.17)
Downgrade to underperform with a lower target price (TP) of RM1 (from RM1.15):
Excluding a one-off unrealised foreign exchange gain (RM200,000), loss on disposal of property, plant and equipment (RM400,000) and write-down of inventories (RM40,000), White Horse Bhd’s first half of financial year 2019 (1HFY19) core net loss (CNL) of RM18.4 million missed both our and the consensus CNL estimates of RM9.2 million and RM9.7 million respectively. This was mainly due to lower-than-expected tile demand in both Malaysia and Vietnam, coupled with weaker-than-expected average selling prices (ASPs) and higher-than-expected production and operating costs. No dividend was announced as expected.

 
Year-on-year, its 1HFY19 CNL widened drastically to RM18.4 million, compared with RM900,000 for 1HFY18, mainly due to: i) a revenue contribution 12% lower due to poor tile demand in both the local and overseas markets (Malaysia and Vietnam’s sales dropped by 12% and 24% respectively); ii) a lower gross profit margin at 11% (from 17% for 1HFY18) and a huge drop in earnings before interest and tax margin from 2% for 1HFY18 to losses (-7%) for 1HFY19 largely due to higher production and operation costs. Quarter-on-quarter, second quarter (2Q) of FY19 recorded a higher CNL of RM9.6 million (+10%) due largely to margins deteriorating significantly (-13%) but partly offset by a slight improvement in revenue to RM128.2 million (+1%).

White Horse’s business operations remain challenging due to stiff market competition, high production and operation costs, fluctuation in foreign currencies and pricing strategy. Moving forward, we remain cautious about the company’s outlook as its business operations rely heavily on the construction, property development and renovation industries, which are currently undergoing slower growth and a challenging business environment.

Post-results, we widened our FY19 and FY20 CNL estimates to RM35.3 million-RM35.9 million (from a CNL of RM9.2 million and a core net profit of RM1.4 million respectively) in view of weaker sales generated in both the local and overseas markets due to stiff competition, challenges and a slow market pace in both the construction and property development industries, as well as higher production cost.

We downgrade our call to “underperform” with a lower TP of RM1 (from “market perform”; TP: RM1.15). Our valuation is below the current trough level of 0.5 times, which we believe is justified due to the following: i) the company has recorded losses for five consecutive quarters since 2QFY18; ii) a slower pace of construction and property development; and iii) widening losses due to rising production cost.

Risks to our call include sharp rises or falls in ASPs and production volume. — Kenanga Research, Aug 26

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