Spring Art is a one-stop RTA office and household furniture manufacturer that caters to 35 countries and expected to generate decent growth moving forward on back of its in-house design, manufacturing and marketing team. We project a 3-year core net profit CAGR of 11.2%, underpinned by additional subcontractor capacity and its expansion plans into North America and Europe. We derive a fair value of RM0.28, based on 12.5x PE (c.19% premium to its peers average of 10.5x, reflecting its superior margins) tagged to FY20 EPS of 2.2 sen.

One-stop RTA furniture manufacturer. Spring Art is involved in design and development, manufacturing as well as marketing and sales of its own furniture products. It analyses its past sales, using the market data to understand its consumer preference better and keeping abreast with the trend.

Manufacture of RTA furniture products in flat pack format. Spring Art’s RTA furniture is sold unassembled in flat pack format (included with assembly instructions for the end consumer), which reduces storage space requirements and cost of shipping while being less vulnerable to damage during transportation.

Wide range of clients and diversified revenue based. Spring Art’s furniture products are exported to 35 countries, including distributors, showroom retailers, home finishing chain stores and e-commerce companies.

Healthy furniture industry outlook. According to Providence independent market research, Malaysia’s furniture industry and global demand grew at 2010-2018 CAGR of 8% and 2.9% to RM4.8bn and USD453.0bn, respectively. With the government’s policy on the implementation of sustainable forest management, this should bode well for demand for processed wood products (particleboard, medium density fibreboard (MDF) and RTA). Also, export-oriented furniture players stand to benefit from the trade diversion with the imposition of tariffs by the US on selected Chinese goods, including furniture.

Expansion plans for its RTA manufacturing capacity. Spring Art intends to purchase machineries (2 CNC panel saw machines, 6 edge banding machines and 9 CNC woodworking machines) in the next 24 months to increase its capacity by c.100% to 674k by FY22.

Near term growth from subcontracting. As the new manufacturing facilities will only commence operation by July 2022, Spring Art has appointed Bright Showcase Sdn Bhd as subcontractor to undertake the manufacturing of furniture products in May 2019 for a term of 3 years. This will allow Spring Art to increase capacity by 49,158 units p.a., or 14.6% of current capacity of 337,016 units. Total purchase orders within Jun-Sep 2019 stood at 10,921 units.

Forecast. While the doubling in annual capacity will be seen in FY22, the near-term growth will be underpinned by the additional subcontractor capacity. With that, we project a 3-year core net profit CAGR of 11.2% on the back of higher demand coming from Asia Pacific and Middle East as well as its expansion plans into North America and Europe.

Fair value of RM0.28. Based on the IPO price of RM0.25, Spring Art is priced at FY19-21 (FYE: Dec) P/E of 12.2x, 11.2x and 10.7x, respectively. To reflect its superior margins (double its peers average), Spring Art could be valued at PE multiple of 12.5x (c.19% premium to its peers’ average of 10.5x), leading to a fair value of RM0.28.

Source: Hong Leong Investment Bank Research - 7 Nov 2019