This article first appeared in The Edge Financial Daily on June 24, 2019
Chin Hin Group Bhd
(June 21, 76 sen)
Maintain outperform with an unchanged target price (TP) of RM1: Chin Hin Group Bhd announced that it will be subscribing for a 30% stake in Starken Philippines Inc (SPI) for a total cash consideration of 3.3 million peso (around RM270,000), after which the company will become an associate.
This acquisition is a positive one though seemingly minor in nature, in that it marks a more significant foray by the group into a new market, one with immense potential as SPI currently serves some of the country’s largest and most reputable developers. Also, it improves utilisation at its second autoclaved aerated concrete (AAC) plant in Johor, which bodes well for profitability.
We continue to like the group’s prospects as it starts to deliver on increased contributions from its autoclaved concrete business via new export markets (which we had mentioned before), while also expecting fresh impetus from its precast concrete business owing to more infrastructure-related spending. Forty-five per cent-owned Solarvest Holdings is an attractive wild card with the government’s focus on increasing the renewable energy mix to total power generation. Our “outperform” call is retained with an unchanged TP of RM1, translating into around 11 times multiple to financial year 2020 earnings per share of 8.8 sen.
Starken Philippines is currently engaged in importing, exporting, buying, selling, distributing and marketing of construction materials specialising in AAC blocks and AAC panels on a wholesale and retail basis.
With the entry of Chin Hin Group as a shareholder, we gather the strategy is now to forge closer working relationships which may possibly involve having management representatives on board and to increase export volumes into the country.
The Philippines market is anticipated to bump up current utilisation at its second plant in Kota Tinggi from 30% to 50%. Our earnings estimates are left unchanged at this point however, pending more concrete delivery in numbers. Additional net profit contributions from this development could be about RM5 million annually nonetheless.
Growth in the Philippines market is encouraging, hitting +15.1% in real terms in 2018, preceded by an average growth rate of 9.6% in the prior four years. Residential construction constituted the bulk, making up about 33% of industry activity.
AAC products have been gaining traction in the Philippines for its ability to provide rigid structures, insulation, fire resistance, and cost savings in construction. With the gradual shift towards green building standards and/or certifications, AAC block and panels are also seeing increasing usage given its compliance to such. — PublicInvest Research, June 21