My first furniture stock in Bursa Malaysia – POH HUAT

In the first place, furniture stocks will never come into my investment portfolio radar, maybe due to the perception of low margin, highly competitive and slow grow prospect. But after I went through the AR of this company report. I started to change my perception. Conventional thinking, most of the local retail furniture shops are not doing well, so in my opinion the furniture manufacturers also shouldn't be good either. In certain extend, I might be right but how about the furniture exporters that earning USD. For the past few years, there was a theme of furniture stocks, but now already cool off. Now, to most of the investors, furniture stock considered as sunset business, one word“hopeless”. But if you look at this company 5 years financial highlights, it doesn't look so dull, in fact,  the company still growing.

CAGR for the past 5 years

1)Turnover - 6.4% (not that impressive but pass 3 years around 12.4%)

2)PBT - 28% (very impressive)

3)PAT - 56% (very impressive)

4)EPS - 26% (very impressive)

Company background

*“The company has its roots in Muar in the southern state of Johor, which is the heartland of Malaysia’s furniture industry. Today, its local manufacturing facilities have expanded to 5 factories, located on 24 acres of land, with about 800 workers. This is the company’s base for producing, primarily, panel-based wood furniture for office and home-office systems, made from laminated particleboards and metal parts. The manufacturing process is relatively simple – cutting, boring, edging and packing – and involves a high level of automation. Products are either manufactured based on in-house designs and marketed under its own brand names (‘AT Office Systems’ and ‘AT Home System’) or customised to order. A typical office suite comprises of tables, worktops, side extensions, counters, pedestals, cabinets and workstations. The newest addition to its product range is the panel-based bedroom sets, mainly for export to the US market. In 2003, Poh Huat expanded its manufacturing base to Vietnam, where there is a greater pool of skilled workers to produce higher quality (value) spray orientated wood furniture, mostly bedroom sets. Its manufacturing bases in Vietnam are situated in 2 locations, namely the districts of Binh Duong and Dong Nai, near Ho Chi Minh City.”

What I like?

-the company is focus on the US and Canada market (90%). As North America economy on the steady recovery path, so the demand of new houses also on the rise, this should benefit furniture exporters like Poh Huat. That's mean the company still has plenty room to grow.

-recently acquired a warehouse in Australia, according to the management, Australia market quite similar to North America in term of personal preference on furniture. We might see the contribution from this part of world in a few years time

-a net cash company, with RM32.9m (maybe already expexted because most of the furniture stock in net cash position)

-* from latest quater report

”Shipment of furniture from our Malaysian factories increased substantially as a result of the coming on-stream of new products, including panel based bedroom models, introduced in the previous quarters. Contribution from its panel based bedroom models for the US market increased to 20% from 5% previously. Shipment of furniture from our Vietnamese operations were also higher in line with improvement in the US economy and its efforts to ship higher value orders to the US.”

* from research report

“To expand its market share, the company has a two-pronged approach. On one hand, it is moving up the value chain by producing home furniture sets targeted at the medium and upper-medium segments of the market, which carry better margins and are less competitive. On the other hand, it is also moving down, to the lower-mid market segments with its panel-based bedroom sets to encompass the home and SoHo segments. This move has since produced tangible results, as evidenced by the increase in sales and earnings. The company indicated that panel-based bedroom furniture now accounts for some 20% of sales from the local plant. Utilisation improvement has translated into better economies of scale.”

-attractive valuation with low PE, steady cash flow, strong balance sheet, ROE-20% and DY-4%

Some risks but not limited to

• depleting woods resources and increasing in wood costs (as latest governance announcement that ban rubberwood export from 1^st July is a good news to the company)

• tightening in regulation and law in countries where the Group operates and sell to (Trump protectionist trade might pose some threat to the company)

• subject to world economic changes since the Group operate in and sell across the globe;

• expose to foreign workers shortage problem (due to illegal foreign workers issue)

• exposure to foreign exchange fluctuation; (as export oriented, stronger USD is good for the company)

• production availability and technical changes in manufacturing processes

To me, the fair value of this company is around RM2.50

*derived from AR and some research report

FOR SHARING PURPOSE ONLY, NOT A BUY OR SELL CALL ON THE COMPANY