Wegmans’ 2QFY22 core net profit jumped by 265% YoY to RM4.7m, mainly attributable to the improved operational efficiency given a higher sales volume. Cumulative 1HFY22 core net profit of RM8.6m was above our expectations, accounting for 68% of our full-year estimates. The discrepancy in our numbers was mainly due to the stronger-than-expected profit margins. Therefore, we are adjusting our FY22-24F forecast upwards by 5-15% as we raise our margin assumption to factor in the improved operational efficiency. Although headwinds from rising inflationary pressure and interest rates will affect demand, we remain optimistic on Wegmans future prospects, mainly premised on the group’s positioning as an Original Design Manufacturer (ODM) that should help to improve its pricing power. Meanwhile, Wegmans’ production was previously affected by labour shortage issue but we understand that situation has now improved, which could lead to greater production efficiency and higher margin. We maintain our Outperform call on Wegmans with a higher TP of RM0.30 (from RM0.28), based on 10x FY23F EPS. On a side note, Wegmans proposed an interim dividend of 0.5sen.

• Results review. Wegmans’ 2QFY22 revenue surged by 55.1% YoY to RM41.5m, due to higher export sales especially the North America region and the absence of Movement Control Order 3.0 (MCO 3.0). Recall that Wegmans’ operations were suspended for 4 weeks in June 2021 due to the implementation of MCO 3.0. PAT margin also increased to 14.6% (2QFY21: 5.9%), thanks to the greater economies of scale and the favourable forex rate. On a QoQ basis, Wegmans net profit grew by 15.1%, mainly due to the increased in exports to the North America region.

• Outlook. While the rising inflation and interest rates may dampen furniture demand, we think that Wegmans will be able to mitigate the risk given the strengthening of USD and its positioning as an ODM which should enable the group to have better pricing power. In addition, we understand that the group had recently obtained approval to employ 400 foreign workers and is currently in the midst of on-boarding its workers, which should help Wegmans to raise its production volume. We think that there is a possibility for Malaysian manufacturers to benefit from importers to further diversify from China due to US-China trade war and the country’s strict lockdown measures.

Source: PublicInvest Research - 25 Aug 2022