Wegmans’ 1QFY23 headline net profit fell by 96% YoY to RM0.2m, dragged by weaker furniture exports especially to the North America region. After adjusting for gain on foreign exchange, Wegmans turned into a core net loss of RM0.1m, which was below our expectations. The discrepancy in our forecast was mainly due to the lower-than-expected furniture demand. We slash our earnings forecast by 30-43% for FY23-25F, mainly to account for the weaker demand given the rising interest rates environment. In view of the challenging operating environment for furniture manufacturers, we downgrade our call on  Wegmans to Underperform, with a lower TP of RM0.15 based on a PE  multiple of 8x FY24F EPS.

• Results review. 1QFY23 revenue decreased by 36.1% YoY to RM23m, as  both furniture (-35.6% YoY) and hardware (-37.9% YoY) manufacturing segment reported lower sales. The furniture segment was mainly dragged by the lower sales from the North America region likely attributable to the weaker consumer sentiment. Wegmans’ headline net profit dropped by  96% YoY to RM0.2m, in-line with the lower sales volume. Operating profit  margin fell to 3.3% (1QFY22: 15.6%) on weaker economies of scale and  higher staff costs.

• Outlook. We remain wary over Wegmans’ future outlook as we are  expecting a slow-down in furniture demand, mainly due to the weaker property market, dragged by the rising inflationary pressure. Cumulative  4MCY23 US New Home Sales fell by 9.7% YoY to 2.6m units. While the favourable forex rate should bode well for furniture exports, we think that it will not be sufficient to mitigate the negative impact of the challenging operating environment. That being said, we project Wegmans’ FY23F core net profit to fall by 56% YoY.

Source: PublicInvest Research - 26 May 2023