Business profile - Kim Hin Industries Berhad (KIMHIN) is one of the nation largest tile manufacturers which establish itself as a leading integrated manufacturer of a diverse range of ceramic products. It is engaged in the manufacture and sale of ceramic floor, homogeneous, and monoporosa tiles. Based on the FY14 annual report, it is also involved in the wholesale and retail of ceramic tiles, as well as trading of building materials. It operates in Malaysia (contributed circa 68% of total revenue), the People’s Republic of China (circa 19%), and Aus tralia (circa 13%). The company is headquartered in Kuching, Malaysia.
Forex exposures – Based on the FY14 annual report, approximately 34% (2013: 32%) of Kimhin’s sales are denominated in foreign currencies whilst almost 17% (2013: 17%) of its costs are denominated in the foreign currencies. The foreign currencies are mainly denominated in USD, AUD and EUR.
Positives - (1) a proposed acquisition of Johan Ceramics Berhad (98% owned subsidiary of Boustead Building Materials Sdn Bhd, which in turn is a wholly-owned subsidiary of Boustead Holdings Berhad) on 17 Dec 2015 is expected to expand Kimhin’s production capacities in Seremban and enable it to better position itself for the West Malaysia market while enhancing its flexibility in its production planning of various product ranges; (2) the acquisition of Johnson Tiles Pty Ltd, an Australian company, is also expected to boost its earnings as it plans to open more retail outlets throughout Australia to distribute Johnson Tiles; and (3) the sharp decline in the global crude oil prices is expected to lower KIMHIN’s operational cost, boosting its profit margin.
Strong balance sheet and attractive net cash – Balance sheet remains healthy as post recent acquisitions net cash per share is still high at 28 sen or equivalent to 12.6% of its share price. KIMHIN has circa RM43m net cash.
Undemanding valuation - At RM2.22 per share, the stock is trading at trailing 12 months P/E of 8.7x. Ex-cash trailing 12 months P/E is lower at 7.6x, which is 84%, 79% and 69% discount to its 3-, 5-, and 10-year historical average P/E of 48x, 36x and 25x respectively.
We recommend a trading BUY on KIMHIN, given the recent share price retracement. Chart wise, share price entered into a fascinated trading range between RM2.47 and RM2.06 since Dec 2015. Noticeably, readings from RSI, MACD and Slow Stochastics showed that price is likely to reverse their retracement soon. Further upside targets are at RM2.47 and RM2.60, with a longterm objective of RM2.88. Supports are at RM2.18 and RM2.12. Cut loss below RM2.08.
Attractive risk to reward ratio with 29.7% upside against 6.3% downside. We see a good risk to reward ratio for investor with a theoretical entry price of RM2.22 given that the downside to the cut loss zone of RM2.08 is 14 sen (-6.3%) while the upside to the LT target of RM2.88 is 66 sen (+29.7%).
Source: Hong Leong Investment Bank Research - 19 Feb 2016