Signature International Bhd
(Oct 10, 47.5 sen)
Maintain buy with an unchanged target price (TP) of 60 sen: Signature International Bhd closed financial year 2019 (FY19) with an order book of RM188 million, comprising new jobs with values ranging from RM1 million to RM26 million, 40% higher than the RM134 million order book as at FY18. The surge may indicate that the worst is over for the company.

 
We believe that Signature will indirectly benefit from increases in property sales during the Home Ownership Campaign (HOC) period.

The company is expected to see new project orders coming in after two years and possible increases in retail sales when the construction of HOC homes is completed three to four years from now. According to the management, the increase in order book to RM188 million did not include any contracts for HOC homes.

Contract awards for new projects would usually come when project milestones reach 50% or above. In other words, awards of kitchen-system contracts for HOC homes would possibly come from 2021.

In our last report, we highlighted a new product series launched by the company to revitalise retail sales, which declined to RM42.8 million for FY19 from FY16 to FY18’s average of RM50 million. The new product series, in terms of storage space, design and colour, is a total revamp of the old series, which would allow the company to differentiate itself from its peers.

The company has recently acquired a software which would enable customisation of the entire home, not just the kitchen, according to customer preferences. Essentially, this software, which has an enormous amount of data in its library, can offer a new home makeover without changing the structure of the property.

According to the management, the customer would just need to provide a floor plan and the software would then recommend all kinds of interior design with pricing for the customer to consider. The customer can add or delete any items — from televisions and sofas, wallpapers, curtains, sanitary wares to any decorative items — in the cart and would know the total cost instantly.

With the help of this software, Signature can be an interior designer too.

We are positive on the company’s effort in keeping abreast of changes in technology and staying ahead of the curve in terms of product innovation and customer satisfaction.

According to the management, four factors are expected to improve Signature’s FY20 profitability. First, the increase in order book, coupled with the completion of low-margin projects, is expected to boost FY20 profit and margins. Next, a change in the supply chain, where the company has started engaging directly with suppliers of raw materials, could offer some leeway to margin improvement and inventory management. Then, the impairments and write-offs made over the past few years would improve asset quality, translating into stable if not higher margins in FY20. Last but not least, the cost-rationalisation programme initiated in FY18 by reducing the headcount and lowering overhead expenses would continue to play out in FY20 to fuel earnings growth.

Taking into account the four factors above, we project its FY20 earnings to grow by 121% to RM11.3 million. The strong earnings growth is also partly due to a low-base effect as its FY19 core profit was affected by declines in revenue and margins.

Despite the weak FY19 result performance, Signature’s share price has surged by 49.3% year to date.

We think this is not unjustifiable given its strong balance sheet quality.

Furthermore, recent active share buy-backs by the company indicate that Signature shares could be undervalued. — TA Securities, Oct 10