This article first appeared in The Edge Financial Daily on February 11, 2019

White Horse Bhd
(Feb 8, RM1.52)
Maintain sell with a lower target price (TP) of RM1.33: White Horse Bhd’s fourth quarter of 2018 (4QFY18) earnings are expected to be unexciting. The overall demand for tiles remains subdued as property developers focus on clearing inventory, and also with less construction jobs awarded. With no near-term earnings recovery and the absence of dividends, the risk reward remains negative in our view.

We maintained our “sell” call with a lower TP of RM1.33 (-11 sen) pegged at its global financial crisis (GFC) trough valuation of 0.41 times price-to-book value (PBV), against 0.44 times financial year 2019 estimate (FY19E) PBV previously. We expect White Horse’s 4Q18 earnings to be lacklustre (3Q18 core net loss: RM 1 million; the first nine months of 2018: -RM2 million).

As White Horse relies heavily on residential and commercial property projects to drive demand for tiles, the subdued property and construction market in Malaysia still poses a significant barrier to White Horse’s earnings recovery. We understand that White Horse’s overall residential-to-commercial sales volume ratio is 60:40. Further, with slower demand for tiles, we also expect 4Q18’s ceramic tile average selling price to remain suppressed, amid an ongoing stiff price competition among peers.

We believe White Horse’s Vietnam operations could remain in the red in FY18. Similar to its Malaysian operations, demand for tiles in Vietnam remained weak given an intense industry competition. Hence, we suspect that White Horse had been rationalising its obsolete stock at below break-even costs which continued into 4Q18. We estimate White Horse’s manufacturing plants in Vietnam are now running at below 50% utilisation.

With a challenging outlook for White Horse and a lack of near-term catalysts, we do not discount the possibility that valuations could revisit their GFC troughs; White Horse traded at 0.41 times PBV at end-October 2008. Moreover, we believe White Horse is likely to cease its dividend payout from FY18 to conserve cash — imputed into our estimates.

Going into FY19, our model imputes for +3% year-on-year demand growth but there is a downside risk to our estimates if there is no gradual recovery in demand for residential and/or commercial properties going forward. We maintained our earnings estimates pending the release of White Horse’s 4Q18 results — Maybank IB Research, Feb 8