Poh Huat - Capacity Expansion to Drive Earnings

Date: 05/10/2020

Source  :  AffinHwang
Stock  :  POHUAT       Price Target  :  1.96      |      Price Call  :  BUY
        Last Price  :  1.87      |      Upside/Downside  :  +0.09 (4.81%)

  • Poh Huat’s furniture orders are currently filled until February 2021, underpinned by a strong pick-up in demand from the US market.
  • Noting the recent run-up in the share price, we believe that there could still be upside as management guided capacity expansion in FY21
  • We lift our earnings estimates by 5.5-34% for FY20-22E, mainly to factor in a better-than-expected demand recovery as well as the guided expansion in capacity. We also revise our TP higher at RM1.96 based on an unchanged fully diluted CY21E PER of 8x.

Healthy Furniture Demand – Orders Up to February 2021

We recently hosted an investor meeting with Poh Huat. Management guided that monthly sales in August had reached RM70m (+20% of FY2019 average of RM58.4m). Currently, the order book is for deliveries up to February 2021. We believe the pick-up in demand could be due to seasonally stronger year-end demand due to festivities. Strong inventory restocking activity was also observed from its US customer as the company was surprised by the optimism in the home and furnishing market post the COVID-19 lockdown.

Capacity to Potentially Expand by 30% by FY22

In anticipation of stronger demand coming from the US, Poh Huat is allocating about RM25-30m in FY21 for capacity expansion in its Malaysian operation. Including simultaneous improvement in automation in other plants, total capacity could potentially increase by 30% in FY22.

8MCY20 Malaysia Furniture Exports to the US Jumped 64% Yoy

According to Malaysia’s External Trade Statistics (METS), Malaysia furniture exports stood at RM8bn for 8MCY20 (+9.6% yoy) as compared to RM7.3bn recorded in 8MCY19. The increase in exports was mainly to the US market, where exports rose strongly to RM4.7bn in 8MCY20 (+64% yoy). We expect demand from the US to remain healthy, supported by trade diversion and strong new and existing home sales data in the US, which hit a 13-year high in August 2020, reaching 1m (+43.2% yoy) and 6m (10.4% yoy). Hence, we believe Poh Huat’s earnings could potentially fare better due to its larger exposure to the US market (90% of Poh Huat’s FY19 revenue was from North America).

Source: Affin Hwang Research - 5 Oct 2020

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