CHINWEL: Correction After Earnings Normalization

Results Update

In QE31/3/2016, Chinwel's net profit dropped 42% q-o-q or 1% y-o-y to RM11 million while revenue dropped 10% q-o-q or 7% y-o-y to RM111 million. Revenue dropped q-o-q due mainly to a 11.3%-drop in revenue in the fastener product segment. PBT dropped 36.9% q-o-q due to decline in both fastener & wire products segments of 25.1% & 40.7% respectively. With the lifting of anti-dumping duties for importation of Chinese by the European Commission in February, the sale of this product will be lower.


Table 1: Chinwel's last 8 quarters' P&L


Chart 1: Chinwel's last 12 quarters' P&L


Table 2: Chinwel's segmental performance for Mar 2016 & 2015

Historical Financial Performance

Revenue for last 2 years was back up to the previous high in FY2011 & FY2012 at around RM500 million per annum. With a bit of help from the weak MYR, Chinwel achieved a net profit of RM64 million in FY2016, which surpassed its previous high of RM48 million recorded in FY2012. It's likely that we had seen peak earning in FY2016. Going forward, I expect its revenue and earnings to be impact by the competition from Chinese products as well as the strengthening of the MYR.
 

Chart 2: Chinwel's last 10 Year' P&L

Valuation

Chinwel (closed at RM1.54 yesterday) is now trading at a trailing PE of 7.7 X (based on last 4 quarters' EPS of 20.08 sen). Assuming that earnings for the next few quarters matches the earnings for QE31/3/2016, Chinwel's EPS for the next full-year will be about 14.4 sen. Thus its forward PER will be about 11x, which is a fair PER for the stock.

Technical Outlook

Chinwel has dropped back to its long-term uptrend line support at RM1.50.


Chart 2: Chinwel's monthly chart as at Jun 16, 2016_12.30 (Source: ShareInvestor) 

At the psychological level of RM1.50, the stock may form a base before recovering.


Chart 3: Chinwel's weekly chart as at Jun 16, 2016_12.30 (Source: ShareInvestor)


Conclusion

Based on recent sharp correction, Chinwel is now trading at a fair valuation as well as supported by long-term uptrend line. As such, Chinwel deserves a HOLD rating.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Chinwel.