Poh Huat’s FY17 core net profit of RM58.2m (+15% yoy) came in above our expectation but within consensus, due to a higher-than-expected contribution from the Malaysian operation. We expect Poh Huat to continue to benefit from higher furniture sales to the USA, its largest export market. We like the stock as we believe earnings will continue to grow driven by its rising office and home furniture sales trend. Our 12- month TP on Poh Huat is now higher at RM2.48 due to our earnings upgrade. We maintain a BUY call on the stock.

FY17 Results Above Our Expectation

Poh Huat’s FY17 revenue grew by 14.8% yoy to RM614.3m, driven by higher shipping volume for both Malaysian and Vietnamese operations due to the continued strong orders from the USA and North American importers. The strong shipment was attributable to the successful launch of several ranges of new models including the panel-based bedroom sets. However, its EBITDA margin weakened in FY17 by 0.2 ppt yoy to 12.7%, mainly attributable to the increase in raw-material costs, particularly for wood, hardware and finishing materials. The commencement of production of several new ranges of furniture products has also resulted in lower manufacturing efficiency and labour productivity during the initial adjustment period. After excluding for one-off items, FY17 core net profit amounted to RM58.2m, higher by 15.0% yoy. FY17 core net profit was above our expectation but within consensus, accounting for 109% of our previous 2017 forecast and 101% of the street’s. The variance was due to a higher-than-expected contribution from the Malaysian operation. Poh Huat declared a final DPS of 3 sen, bringing FY17 DPS to 8 sen (FY16 DPS: 8 sen).

4QFY17 Core Net Profit Increased by 97.3% Qoq to RM19.2m

Sequentially, Poh Huat’s 4QFY17 revenue increased by 13.3% qoq to RM171.7m, attributable to the higher contributions from Malaysia and Vietnam but partially offset by a lower contribution from South Africa. The Malaysian and Vietnamese operation’s revenue increased by 20.9% and 8.8% qoq, respectively, to RM70.1m and RM101.3m, while revenue from South Africa declined by 27.6% qoq to RM0.21m. After excluding for oneoff items, core net profit increased by 97.3% qoq to RM19.2m.

Maintain BUY With a Higher TP of RM2.48

Given the stronger-than-expected FY17 results, we have raised our FY18- 19E core EPS forecasts by 2-4%, mainly to account for higher contribution from the Malaysian operation. We also introduce our FY20E core EPS of 30.7 sen. Due to our upward revision of earnings, our 12-month target price for Poh Huat is now higher at RM2.48 (up from RM2.39), based on an unchanged PER of 9x on our FY18E core EPS. We continue to like Poh Huat as we opine that growth prospects from its existing business markets and expansion into new markets like Australia offer decent earnings catalysts. In line with the sustained demand for furniture in the USA market, Poh Huat’s largest export market, the company has continued to enjoy strong orders from customers from the USA for both the office and home furniture segments. Maintain BUY call on the stock.

Key Risks

The downside risks to our BUY rating would be: 1) major cut in the supply of rubberwood; 2) substantial increase in raw-material prices and labor costs; 3) substantial drop in furniture exports; 4) unfavourable policies curtailing furniture exports; 5) a sharp drop in ASPs for furniture products; and 5) weaker economic growth in key export markets curbing demand.

Source: Affin Hwang Research - 21 Dec 2017