This article first appeared in The Edge Financial Daily on November 12, 2019

Chin Hin Group Bhd
(Nov 11, 82.5 sen)
Maintain outperform with an unchanged target price (TP) of 94 sen: Chin Hin Group Bhd announced various proposals late last week which will see it essentially dispose of RM76.5 million worth of assets to its major shareholders. We are positive on this development as it allows the group to retire some borrowings and achieve cost savings, while also providing it some cash to fund its growth needs. While the transaction will see about RM12.6 million in disposal gains recorded, we leave our full-year estimates unchanged pending the completion of the deal which will need shareholders’ approval given that it is a related party transaction. We continue to like the group’s long-term prospects, underpinned by: i) increased contributions from its autoclaved concrete (new export markets) and precast concrete businesses; and ii) increased contributions from its investment in the 34%-owned (post initial public offering) Solarvest Holdings Bhd.

The assets identified are: 1) 100% equity interest in Ace Logistic Sdn Bhd, a company which owns two semi-detached factories in Nilai and two single-storey terrace houses in Kepala Batas; 2) 11 units of shop offices together with 89 car parks in Kuala Lumpur; 3) one factory in Shah Alam; and 4) 23 units of shop offices in Alor Setar. Item 1 is being disposed of for a cash consideration of RM20.8 million while items 2 to 4 are being sold for a collective RM55.7 million. Consequent to these transactions, 14 tenancy agreements will be entered into between the group and the buyers for five units of shop offices and 89 car parks in Kuala Lumpur, as well as for seven units of shop offices in Alor Setar.

The amounts raised by these few transactions will be utilised in the following manner: i) repayment of bank borrowings within three months — RM50 million; ii) working capital purposes within 12 months — RM23.5 million; and iii) estimated expenses for proposals within three months — RM3 million.

The proposed repayments are expected to result in net cost savings of about RM180,000 (interest savings of RM2.24 million and cash rebates of RM2.25 million, less rental expenditure of RM2.48 million and a rental income loss of RM1.8 million). Its gearing ratio will drop to 1.11 times from 1.25 times as at  Dec 31, 2018, while disposal gains from the transactions will amount to some RM12.6 million. Allowing for the group to unlock the market values of their property assets, the transactions also minimise the administrative tasks of the group in monitoring and maintaining the said assets in addition to achieving cost synergies.

Our “outperform” call is retained, with an unchanged TP of 94 sen on a 12 times multiple of financial year 2020 earnings per share. — PublicInvest Research, Nov 11