KUALA LUMPUR (Nov 3): UOB Kay Hian has upgraded the furniture and particleboard sectors to "overweight" as it expects furniture and particleboard companies to generate strong earnings momentum on robust demand and better margins.

The research house’s analyst Jack Goh in a note today said Malaysia’s furniture industry remains under the limelight and is poised to generate impressive earnings momentum in 2H20.

This is boosted by several catalysts including structural demand shift on the US-China trade tension; pent-up demand for furniture, riding on the work-from-home trend; and margin expansion on price hikes and improved utilisation.

“Local furniture companies such as Lii Hen Industries Bhd, Homeritz Corp Bhd and Poh Huat Resources Holdings Bhd, which export mostly to the US and Europe, will benefit,” said Goh.

Goh also opined that particleboard companies such as Mieco Chipboard Bhd and Heveaboard Bhd (Hevea) are set for a turnaround from losses in 1H20 to deliver spectacular earnings in 2H20, backed by robust demand, sharply higher prices and favourable sales mix.

“We gathered that Mieco and Hevea are seeing overwhelming demand from local furniture manufacturers since the RMCO [in June], and their order visibility remains good through to 1Q21 even though their production lines are currently running close to full capacity at 80-90% utilisation rates,” said Goh.

Goh also said the shortage of particle boards in the market to fulfil explosive export demand (particularly to the US) has led to aggressive average selling price (ASP) revision, with chipboard prices surging by as much as 20-30%.

Mieco, in particular, has greatly benefitted from price hikes and the shift in sales mix, he added.

Goh also noted Malaysian particleboard producers have emerged from an intense pricing competition from Thailand producers which have depressed particleboard prices in 2017 to 2019.

However, he said they are now poised for a new leg of earnings growth, driven by a trifecta of factors: ASP hike, sustainable orderbook visibility with delivery lead time rising to at least four months, and lower raw materials prices which lift profit margins.

Goh believes the particleboard companies’ share price recoveries are in sync with that of furniture producers, and could outperform the furniture sector with the segment’s expected claim to earnings prominence and turnaround from losses in 2H20.

“Our top pick for the particleboard segment remains Mieco despite its more than 40% share price appreciation since our last report two months ago. Besides nursing itself back to high profitability, Mieco is on course to restructure some of its short-term debts for a healthier balance sheet,” said Goh.

At 11.19am, Lii Hen rose 15 sen or 3.82% to RM4.08, Homeritz increased by 1 sen or 1.25% to 81 sen, and Poh Huat went up 4 sen or 2.3% to RM1.78.

Meanwhile, Mieco rose 3 sen or 6.25% to 51 sen, while Heveaboard increased by 1.5 sen or 3.03% to 51 sen.