Demand for Poh Huat’s range of furniture expected to be healthy

TheEdge Mon, Jul 01, 2019 10:54am - 4 years View Original


Poh Huat Resources Holdings Bhd
(June 28, RM1.55)
Maintain buy with a higher target price (TP) of RM1.80:
Poh Huat Resources Holdings Bhd registered a higher revenue of RM344.1 million in the first half of financial year 2019 (1HFY19), up 19.7% year-on-year (y-o-y), attributable to a higher shipment of furniture from both its Malaysia and Vietnam operations. The Malaysia operations, in particular, posted a strong revenue of RM163.4 million (+31.6% y-o-y), mainly due to strong demand for its panel-based bedroom set, coming from new and existing US customers. For its Vietnam operations, revenue stood at RM180.6 million (+10.7% y-o-y) as Poh Huat continued to enjoy sustained demand after adjusting its product mix to the more affordable product range for the US market. Earnings before interest, taxes, depreciation and amoritsation (Ebitda) margin for 1HFY19 was slightly higher at 9.8% (+0.5ppt), mainly as a result of: 1) lower raw material costs, and 2) better manufacturing efficiency for its Malaysia operations.

 

Excluding one-off items, 1HFY19 core earnings came in broadly within our expectations at RM25 million (+34.6% y-o-y).

 

On a quarter-on-quarter (q-o-q) basis, revenue and core net profit declined by 25.4% and 37.6% to RM147 million and RM9.6 million respectively. The decline was partly attributable to lower production level due to the Lunar New Year holidays, especially for its operations in Vietnam. Meanwhile, its Ebitda margin contracted by one percentage point q-o-q to 9.2% partly due to the shift in product mix to the affordable range, keener price competition and higher direct labour costs in the Vietnam operations. Poh Huat has also declared an interim dividend per share of two sen for the quarter (1HFY18: two sen).

Poh Huat, on a regular basis, will adjust its product mix in order to retain its customers. Currently, the customers’ preference is towards the trendier but more affordable range of household furniture. As such, we expect demand for Poh Huat’s range of furniture to remain healthy.

Given no major earnings surprises, we leave our FY19-21E core earnings per share (EPS) forecasts unchanged. We maintain our “buy” call on Poh Huat with a higher TP of RM1.80 (from RM1.71 previously), after rolling forward our valuation horizon to CY20E core earnings per share (EPS) but with unchanged target price-to-earnings ratio of 7.2 times. Current valuation looks attractive at 6.6 times/6.3 times FY19/20E core EPS. We also expect dividend yields to sustain at around 5% at current levels. At this juncture, we believe that the lingering uncertainty of the US-China trade war could likely continue to present opportunities for Poh Huat in gaining some market share from its peers, especially in the US export market.

The downside risks to our “buy” rating would be: 1) major cut in the supply of rubber wood; 2) substantial increase in raw-material prices and labour costs; 3) substantial drop in furniture exports; 4) unfavourable policies curtailing furniture exports; 5) a sharp drop in average selling prices (ASPs) for furniture products; 6) strengthening of the ringgit against the US dollar, and 7) weaker economic growth in key export markets curbing demand. — Affin Hwang Capital, June 28

 

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