Poh Huat’s 1QFY18 core net profit of RM10.2m (-42% yoy) came in below our previous FY18 forecast, due to a weaker-than-expected contribution from the Vietnamese operation. We have cut our FY18-20E core earnings by 8-11% as we update our RM assumption to RM3.80- 3.90/US$ and increase our cost-of-sales forecast. Nevertheless, we still like the stock as we believe valuation looks attractive at 6.2x FY18E core EPS. Maintain BUY rating with a lower TP of RM2.21.

Lower Vietnam Contribution Partially Offset by Malaysian Operations

Poh Huat registered a slightly lower 1QFY18 revenue by 1% yoy to RM161.9m, mainly attributable to lower sales from the Vietnamese operations given the recent shift in product mix to the middle and affordable segments of the market, but partially offset by higher sales from the Malaysian operations due to strong demand for the panel-based bedroom sets for the US market as well as the traditional office furniture. EBITDA margin weakened in 1QFY18 as both Malaysian and Vietnamese operations experienced margin compression due to: 1) strengthening of the RM against the US$; 2) a drop in operational efficiency due to a production interruption from a recent fire incident; and 3) an increase in raw-material costs. The US$ closed at RM3.90 as at 31 January 2018 versus RM4.23 a year ago. The commencement of production of several new ranges of furniture products has also resulted in lower manufacturing efficiency and labor productivity during the initial adjustment period.

Core Net Profit of RM10.2m – Below Expectation

After excluding one-off items, 1QFY18 core net profit amounted to RM10.2m, lower by 42.2% yoy. 1QFY18 core net profit was below our expectation, accounting for 17% of our previous FY18 forecast. The variance was due to a lower-than-expected contribution from the Vietnamese operation due to currency translation from the stronger RM against the US$ and the increase in raw-material costs. Poh Huat has not declared any dividend for the quarter versus a DPS of 2 sen in 1QFY17.

Source: Affin Hwang Research - 19 Mar 2018