We believe the 27% share price plunge from 52w high is overdone and grossly priced a consensus 28% decline in FY18 earnings, mainly due to higher raw materials, rising production costs and stronger RM. We remain positive on POHUAT’s long term prospects, driven by the resurgence of USD, sturdy furniture demand globally and potential positive spill over effect to more cost competitive manufacturers in ASEAN amid escalating US-China trade tensions. Valuations are undemanding at ex-cash FY19 P/E of 5.5x (25% lower than peers) and 1.11x P/B (21% discount to peers), supported by 4.6% DY (15% higher than industry). Potential LT downtrend reversal amid saucer bottom formation.

One of the leading regional furniture producers. POHUAT has more than 30 years of manufacturing in producing world class office system and home furniture system. Its products have found acceptance in more than 60 countries in 5 continents, with US and Canada being the main markets, making up about 69% and 22% of the FY17 sales, while the remaining of the sales came from UK, Malaysia, Singapore and the Middle East region. POHUAT also has sales offices and warehouses in South Africa and Australia.

Manufacturing base. The integrated manufacturing facilities are based in Malaysia and Vietnam. Overall, the manufacturing facilities and activities are organised according to the types of material and processes involved, namely panel based furniture which does not require spray finishing and wooden based furniture involving spray finishing processes. The panel based products, which processes are more machine driven and hence more automated, are manufactured in our facilities in Malaysia. On the contrary, the wood based furniture which entails more elaborate manual driven fabrication and finishing processes are manufactured in Vietnam due to labour availability and cost advantages.

Long term prospects remain favourable. POHUAT recorded superb net profit CAGR of 25% from in the last 10 years. However, consensus FY18 net profit is expected to decline by 28% YoY to RM40m, mainly due to higher raw materials, rising production costs and stronger RM. Nevertheless, we remain sanguine on POHUAT’s long term prospects, driven by the resurgence of USD, steady global furniture demand and potential positive spill over effect to more cost competitive manufacturers in ASEAN amid escalating US-China trade tensions.

Solid balance sheet to withstand external adversities. The furniture industry is highly cyclical with stiff competitions. As such, furniture companies have to embrace to the change in market trends and factors, which may affect its short and long term profitability. We believe POHUAT’s solid net cash of RM79m or RM0.34/share (23% of share price) could act as a buffer to external shocks. Besides, it has land held for property development with book value of RM20.9mn, to be developed in future to broaden the revenue and income base of the group.

Potential downtrend reversal amid rounding bottom pattern. After correcting 45% from 52w high of RM2.08 (25 Oct 2017) to 52w low of RM1.15 (9 Apr), POHUAT rebounded 31% to end at RM1.51. After the bullish downtrend line breakout and refilling the RM1.40-1.51 gap (20 Mar), the stock has been trending above the support trendline and is forming a rounding bottom pattern. A successful violation above neckline resistance near RM1.54 (also the upper channel) will spur prices higher towards RM1.62 (50% FR) and RM1.73 (61.8% FR) levels before reaching the rounding bottom objective at RM1.93. Meanwhile, key supports are located at RM1.42-1.46. Cut loss at RM1.39.

Source: Hong Leong Investment Bank Research - 20 Aug 2018