CHINWEL: Earnings Fall Short Amid Pricing Pressures, Recommendation Downgraded

Performance Review

Core earnings for FY25 significantly underperformed, falling short of both TA Securities’ and consensus expectations. The company recorded adjusted core earnings of RM5.2 million, which represented only 41.6% and 43.0% of full-year forecasts, respectively. This substantial shortfall was primarily attributed to lower-than-expected Average Selling Prices (ASP) across all product segments.

On a year-on-year basis, while revenue saw a 9.5% increase, profitability deteriorated sharply due to heightened price competition in the fasteners and wire markets, leading to a 53.8% decline in core earnings. Sequentially, revenue posted a modest 2.5% increase, but the company slipped into a core net loss of RM1.2 million, a reversal from the previous quarter’s RM2.7 million net profit, again weighed down by persistent pricing pressures.

In light of future operational requirements, the company declared a single-tier interim dividend of 1.1 sen per share for FY25, a decrease from 1.8 sen per share in FY24, as it opted to preserve cash.

Impact on Forecasts

Following the weaker-than-anticipated performance, TA Securities has revised downward its ASP assumptions across the board. This has led to a trimming of earnings forecasts for FY26-27F by 20.7% and 18.7%, respectively. The firm has also introduced its FY28 earnings estimates, projecting a year-on-year earnings growth of 21.1%.

Future Outlook and Recommendation

Management remains cautious regarding industry developments, citing ongoing geopolitical conflicts, US-China trade tensions, and recession risks that continue to dampen global demand for fasteners. While the 95% US tariff on China’s fasteners might create export diversion opportunities, this potential benefit is partially offset by the 50% duty imposed on the Group’s own fasteners and wire products under Section 232.

Domestically, the anticipated restart of major construction projects in Malaysia is expected to offer some sales support to related industries. However, the overall operating environment is expected to remain challenging, with near-term performance largely influenced by external factors beyond the Group’s control.

Consequently, TA Securities has lowered its target price from RM1.09 to RM0.87, based on an unchanged target PER of 11x CY26 earnings. The investment bank has also downgraded its recommendation for the stock from Buy to Hold.