While panel board makers are expected to continue to suffer from low ASPs from a regional supply glut, a very different outlook beckons for furniture makers in 2H20. Going into 2H20, we expect furniture makers to benefit from rebounding sales volumes, weak ringgit levels and cheaper raw material costs. We maintain our NEUTRAL stance on the sector given the divergent fortunes of furniture and panel board makers. Our top picks are Lii Hen (BUY, TP: RM3.65) based on 9x PE on mid-FY21 earnings and Homeritz (BUY, TP: RM0.72) based on 10x PE multiple on FY21 earnings.

Furniture sales returning to pre-covid-19 levels already? According the Malaysian Furniture Association, furniture sales volumes have been surprisingly strong since the resumption of operations. Having recently met with furniture makers Lii Hen and Homeritz, both have confirmed that sales have returned to pre-Covid levels (i.e. that of Jan-Feb 2020).

Furniture makers 2H20 outlook. Going into 2H20, furniture makers Lii Hen and Homeritz are expected to benefit on several fronts from (i) pent up demand, (ii) increased orders to the US from companies diverting orders from China to SEA region due to the still on-going trade war, (iii) weaker ringgit strength averaging RM4.25/USD YTD (vs. 2019 average: RM4.14/USD) and (iv) cheaper raw materials (glue, leather etc.) vs. 2019 prices.

Both Lii Hen and Homeritz are trading at undemanding valuations, have healthy dividend yield and are net cash. In addition to favourable earnings outlook, Lii Hen and Homeritz are currently trading at undemanding valuations of 7.5x and 8.7x PE (or 5.1 and 4.7 ex-cash PE respectively. Furthermore, both Lii Hen and Homeritz are yielding a healthy 6.1% and 5.2% at current price levels. As of end-Feb they are net cash with Lii Hen at RM157.9m (RM0.88/share; 32.3% of market cap) and Homeritz at RM81.1m (RM0.27/share; 46.6% of market cap).

Panel board makers macro issues continue. Panel board makers continue to suffer from excess supply glut in the region. This is mainly due to ample production capacities in neighbouring countries, Thailand and Vietnam, which ramped up capacities to supply the Middle East market. Since US trade sanctions were imposed on the Middle East in 2018, excess capacities have led to ASPs declining significantly as Thailand and Vietnam flooded the market with product. Figure #2 shows the historical PBT contribution of panel board makers Evergreen and Heveaboard. As trade sanctions show no signs of being lifted, we expect the depressed prices (from the supply glut) continuing into 2H20.

Malaysia as a production hub. Despite Vietnam’s reputation as a manufacturing hotbed, we note that the cost of labour in the country has risen dramatically in recent years, reducing its attractiveness as a manufacturing hub. Figure #1 shows the narrowing cost of labour between Malaysia and Vietnam. With this narrowing gap, Malaysia could be poised to grab some of the “US-China trade war demand substitution” from Vietnam.

Forecasts. We Keep Our Forecasts Unchanged.

NEUTRAL. We maintain our NEUTRAL stance on the sector given the divergent fortunes of furniture and panel board makers. Our top picks for the sector are Lii Hen (BUY, TP: RM3.56) and Homeritz (BUY, TP: RM0.72) due to reasons mentioned above.

Source: Hong Leong Investment Bank Research - 10 Jul 2020