Furniture Demand Expected to Remain Sturdy

We expect Poh Huat’s furniture demand to remain sturdy, given the improvement in economic growth and consumer sentiment in its key export markets. However, the rise in manufacturing costs and the strengthening of RM against the US$ has affected margins. We maintain our BUY call on the stock with TP of RM1.64, as valuations still look attractive. Meanwhile, earnings should grow with prudent cost management and sustained demand.

Furniture Demand Likely to Remain Resilient

Strong demand for Poh Huat’s furniture products would be underpinned by: 1) an improvement in consumer sentiment; 2) an increase in demand for furniture coming from countries like the US as economic growth strengthens; and 3) rising number of housing starts. On top of this, Poh Huat refreshes its product range to sustain its strong orders.

Potential Beneficiary From US-China Trade War?

In our opinion, the latest proposed tariff on a further US$200bn of Chinese imports, if set in motion, will force US retailers to look elsewhere for furniture products. Poh Huat may stand to gain from the trade war as the group has existing good relationships with its US customers (70% of total sales).

Margins Hurt by the Rise in Manufacturing Costs

Manufacturing costs have increased mainly due to rising raw material and labour costs. This coupled with the strengthening of the RM vs. the US$ has affected margins. We expect Poh Huat’s PBT margin to weaken to 8.5% in FY18E from 10.9% in FY17.

Sensitivity of Earnings to RM/US$

Poh Huat’s earnings are affected by the movement of RM against the US$ due to its US$-denominated sales. Based on our sensitivity analysis, a 5- 20% movement in the RM could affect EPS by 3-14% for FY18-20E.

Maintain BUY Rating and TP of RM1.64

We maintain our BUY rating on Poh Huat with a 12-month TP of RM1.64, based on 7x PER applied to CY2019E core EPS. Current valuation looks attractive at 6.2x FY19E core EPS. We expect sustained demand from the US market to benefit Poh Huat, as they continue to enjoy strong orders for both their office and home-furniture products.

Source: Affin Hwang Research - 30 Jul 2018