Poh Huat’s 1HFY18 core net profit of RM19.7m (-33% yoy) came in below expectations, due to weaker-than-expected margins arising from higher production costs. We are cutting our FY18-20E core earnings by 10-17% to account for these weak results. Due to our earnings revision and a lower target PER of 7x on our 2019E core EPS, we lower our TP for Poh Huat to RM1.64. We still maintain our BUY call, as we opine that valuation looks attractive now at 6.3x / 5.5x FY18/19E core EPS.

Lower Revenue From Vietnam But Partially Offset by Malaysia

Poh Huat registered a slightly lower 1HFY18 revenue by 1.3% yoy to RM287.4m, mainly attributable to lower sales from its Vietnamese operations given the weaker VND to RM exchange rate, but partially offset by higher sales from the Malaysian operations due to continued strong demand for the panel-based bedroom sets for the US market as well as for traditional office furniture. Its EBITDA margin weakened in 1HFY18 by 5.1ppt to 8.5% as both Malaysian and Vietnamese operations experienced margin compression partly due to: 1) strengthening of the RM against the US$, which resulted in lower selling prices for its products in RM terms; and 2) an increase in raw-material costs and direct labour costs. The US$ closed at RM3.92 as at 30 April 2018 versus RM4.34 a year ago. Also to note, Poh Huat has come to an agreement with its insurer for fireinsurance compensation of RM4.3m for the fire incident at its Malaysian plant back in January 2018. Taking into account the total net book value of RM3m for the assets damaged by the fire, Poh Huat recorded a net gain of RM1.3m.

Core Net Profit of RM19.7m – Below Expectations

After excluding one-off items, 1HFY18 core net profit amounted to RM19.7m, lower by 32.7% yoy. 1HFY18 core net profit was below expectations, accounting for 36.4% of our previous FY18E forecast and 40.1% of street expectations. The variance was due to lower-thanexpected margins due to higher raw-material costs. Poh Huat has declared a DPS of 2 sen for the quarter (1HFY18: 2 sen; 1HFY17: 2 sen).

Source: Affin Hwang Research - 27 Jun 2018