Since I highlighted SHH Resources as a must have for your 2016 stock portfolio on Jan 5 2016, its share price rose 24% from RM2.05 to a high of RM2.45.

After I highlighted the stock, 2 investment banks took notice and gave their fair values at RM2.80 and RM3.09 respectively. However, following the attention given by the investment banks, the share price tumbled 25% from its high to the current price of RM1.83 . Today I will try to touch on what has changed since only a month ago and what investors might be concerned about.

1. USD/MYR

• As SHH mainly derives the bulk of its sales from the export market (USA), the Ringgit undoubtedly plays an important role in earnings. Since my last post, the Ringgit has strengthened by about 5.7% from 4.35 to 4.10. But is this entirely negative for SHH? The answer is NO.
• According to its 2015 annual report, a 10% WEAKENING of the Ringgit would actually DECREASE net profit by RM1.75m and vice versa. Why so? I believe this is mainly due to FX derivative hedges which as at end-FYE2015 stood at a hefty RM25m and USD borrowings which constitues >50% of its total borrowings. Thus, with the Ringgit STRENGTHENING by 5.7%, we can actually expect to see earnings INCREASE by RM900k.
• In fact, if you were to study the latest quarterly earnings (1st quarter FYE16), you will find that there is a RM1.9m loss on fair value of currency derivatives contracts. With the Ringgit strengthening against the USD, some of this will be reversed.

2. Actual volume growth absent currency translation

• Looking at the latest quarterly earnings (1st quarter FYE16), revenue grew by 47% from RM21.8m to RM32m. How much of this is from favourable currency translations and how much is from actual volume growth? To find out, we can do a simple calculation:
• RM21.8m x 1.2 x (1 + volume growth) = RM32m
• Where, RM21.8m is previous quarter revenue; 1.2 represents the strengthening of the USD against MYR (+20% for full year 2015); and RM32m being the latest quarter revenue.
• Solving for the volume growth, you will obtain a growth rate of 22.5% which is the actual volume growth rate. Thus, absent the currency translations, actual volume grew strongly by 22.5%.
• I will only look at topline growth as bottomline jumped by 10 fold and the results will not be as useful.

3. US demand for furniture

• Here, I will only look at the demand and consumption situation in the US as SHH mainly exports to the US. China's slowing economy does not have any direct bearing on SHH's business.
• In addition to the earlier charts that I posted on housing starts, disposable income and spending which are all still growing, I will share with you some  additional data that points to furniture sales still growing STRONG and would likely continue growing.
• Malaysia's December export growth slowed mainly due to oil & gas related sales. However, timber and its related products was still healthy, growing 8.1%mom or RM148.6m in absolute terms in a month (more than SHH's full year FYE15 revenue).
• US Retail sales for furniture stores continue to surge but only reaching back to 2005 levels. If history were to repeat itself, there will be another 3 years (2005-2008) of furniture sales upcycle.
• US Dept of Commerce data shows that furniture store sales rose 5.8%yoy and 16%mom to US$10B per month.

4. Why SHH is attractive at its current price

• SHH is currently trading at an implied PE of only 4.9x and EV/EBITDA of 3.6x based on annualised 1Q earnings for FYE2016. At its current share price, earnings yield is at 20% meaning owners will recoup any investment in 5 years.
• FCF per year (conservative) of RM10m means that at current market cap of RM90m, shareholders will be able to recoup in cash their investment in 9 years.
• Fundamentals and earnings has not changed much or at all. The only things is the Ringgit which has only strengthened by about 6% and is expected to remain volatile (no clear path) in the coming months.
• The company has net cash of 54sen or 30% of its entire market capitalisation. In addition, its properties in Pagoh have no been revalued since 1994 (I recently made a visit to the factories but I will save that story for another day). Safe to say, shareholders will be able to recoup any investment if the case of liquidation.
• Dividend track record for profitable years with potential for special dividend again this year seeing that profits are expected to be strong. Assuming another special dividend payment of 10sen in FYE16, company will still have net cash of 44sen or 24% of its market cap in cash.

Disclaimer: The purpose of this blog is to share some of my findings with fellow blog readers and should not be construed as an invitation or offer to buy/sell any stock. All information presented should be verified independently by the reader and any decision to buy or sell should be based on the reader's own judgement.