1.0 Investment Summary

Signature International Bhd, a branded distributor, manufacturer and retailer of modular kitchen system under the brand name of Signature Kitchen, is at the sweet spot of booming number of service apartment/condominium (SA/Condo) completion in 2015-2017.

Housing starts for SA/Condo in Malaysia has plateuaed in year 2013-2014 while completion data is still below half-of-2008's peak. As historically, completion lagged starts 3 years, number of SA/Condo completion is set to boom beginning from year 2015 and is projected to overtake 2008's peak in 2016-2017. While this is a bad news for the property market, SIGN will be the clear winner from this development as 70% of SIGN's FY2014 sales is derived from Project Sales, where SIGN partners with Property Developers to provide kitchen systems to SA/Condo projects-near-completion.

I give a Buy rating on SIGN with TP of RM3.70 (64% upside) based on 10x FY16 earning, which is generally in line with forward PE given to furniture/particleboard and FBMSmallCap stocks. The Buy rating is based on:

i. SIGN's PAT is projected to double in FY15 and grow at 2-Years-CAGR of 24% for FY16-17 as a) strong sales growth in FY15-17 (CAGR 22%) riding on the booming number of SA/Condo-to-be-completed b) margin improvement from greater economic of scale (Q2FY15 EBIT Margin at 24.7% vs FY14 at 15.6%)

ii. Average trading volume recently surged to 5 years high. SIGN's stock used to have low liquidity.. The improved market interest will provides better trading liquidity and will support better valuation.

iii. SIGN's stock is still undervalued. Though gaining 190% in 2 years time, with TTM PAT have grown 785% for the same period, valuation is still at 3-years-low at trailing TTM PE of 8.4x and FY16 PE of 6.1x. The current valuation is unreasonable given FY15 will be a record-breaking year for SIGN for its sales, profit and margin. SIGN is an undervalued growth stock.

2.0 Business Description

The brand name of Signature Kitchen under SIGN is the largest and, in my view, most-well-known kitchen system provider in Malaysia. With over 20 retail showrooms in Malaysia as well as various marketing and branding activities, SIGN has built-up its name toward Malaysians. SIGN is also in the affordable kitchen market under brand "Kubiq" launched in 2009. Pricing of Kitchen set for Signature Kitchen starts from RM20,000 while Kubiq's starts from around RM5,000.

As in FY14, 70% of SIGN's sales derived from Project Sales where SIGN secures projects from developers to provide kitchen to SA/Condo units as part of the developers' promotional strategy to attract buyers. While there are others premium kitchen brands available in the market, the brand Signature Kitchen has a competitive edge over other competitors due to better branding and popularity. In the past, Project sales have been cyclical following housing market cycle. This is explainable as SIGN only come in to provide kitchen for a project near its completion stage. Hence, SIGN's project sales generally correlate with SA/Condo's completion volume as SIGN provide kitchen to SA/Condo projects.

The remaining 30% of sales contributed from retail business generated via its retail outlets. SIGN's key strength is its branding. As it adopt pull-marketing strategy, retail customers are generally walk-in customers. Hence, headcount in retail outlets can be minimized since sales activities are minimal for retail segment. This also provides better operational efficiency. Unlike project sales, retail sales are non-cyclical and have been stable at the range of RM40m-50m annually even during Global Financial Crisis in 2008-2009.

Over 95% of SIGN sales are from local market. Besides providing kitchen system, SIGN also provide kitchen white goods (appliances) to its customer under third-party brands as well as interior design services. These are mostly value-add service. Kitchen business is still the core income generator.

Based on Initiation report done by CIMB Research in Oct 2013, 75% of SIGN's production cost comes from raw materials, while the rest are subcontractor fees (14%) and kitchen white goods (11%). The major raw materials used are wood-based like chipboard and medium-density fibreboards (MDF), comprises of 40% of raw material cost. At the same report, also mentioned is that SIGN is able to adjust its production capacity quickly as most of the high-volume raw-materials (like MDF) are outsourced. Only the low-volume-high-value-added products are handled by own factory. SIGN is using sub-contractors for the kitchen installation.

2.1 SWOT Analysis

3.0 Financial

4.0 Projection & Valuation

5.0 Risks

Project delay 

SIGN come into a property development project at its final stage. Any delay in project completion will defer SIGN's sales.

Material cost hike

As time from securing projects to work start for project sales can be long, any increase of material cost during this period may not be transferable to the customers.

http://bullandbearresearch.blogspot.com/2015/04/signature-international-bhd-sign-at.html