Higher Operating Costs Affecting Margins

Poh Huat’s 9MFY18 core net profit of RM26.9m (-31% yoy) came in below our expectations, due to a weaker-than-expected margin given higher costs of production. We have cut our FY18E core earnings by 7.6% to account for the weak results but maintain our FY19-20E core EPS forecasts. We believe Poh Huat will continue to adjust its pricing and product offerings to cater for the changes in demographics and market trends. Poh Huat could also potentially benefit from the USChina trade war if the US imposes tariffs on China-sourced furniture. We maintain our BUY call on Poh Huat with an unchanged TP of RM1.64, based on 7x on our CY19E core EPS.

Lower Revenue From Vietnam But Partially Offset by Malaysia

Poh Huat registered a slightly lower 9MFY18 revenue by 2.3% yoy to RM432.4m, mainly attributable to lower sales from its Vietnamese operations due to stiffer competition from manufacturers in Vietnam as well as a shift in product mix to the more affordable ranges, resulting in lower sales value, 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 the traditional office furniture. Its EBITDA margin weakened in 9MFY18 by 3.6ppt to 8.3% as both Malaysian and Vietnamese operations experienced margin compression partly due to the increase in raw-material costs and direct labour costs. After excluding oneoff items, 9MFY18 core net profit amounted to RM26.9m, lower by 31% yoy. 9MFY18 core net profit was below our expectation, accounting for 61% of our previous FY18 expectation. The variance against our forecast was mainly due to higher-than-expected raw-material and direct labour costs. No dividend was declared for the quarter.

Slightly Weaker Qoq Core Net Profit

On a sequential basis, Poh Huat’s 3QFY18 revenue increased by 15.5% qoq to RM145m. The higher turnover was mainly due to higher sales from both Malaysia and Vietnam operations. However, after excluding one-off items, 3QFY18 core net profit was slightly lower by 1% qoq to RM8.3m.

Maintain BUY With An Unchanged TP of RM1.64

Given the weaker-than-expected set of results, we have cut our FY18E core EPS forecasts by 7.6%, mainly to account for higher costs of production given the increase in raw-material prices and labour costs but maintain our FY19-20E core EPS forecasts. We believe Poh Huat will continue to adjust its product offerings to cater for the changes in demographics and market trends as well as make price adjustments to mitigate the increase in raw-material prices and labour costs. Also, we think Poh Huat could potentially benefit from the US-China trade war if the US imposes tariffs on China-sourced furniture, which could make Poh Huat’s furniture more competitive against that made in China. We maintain our BUY call on Poh Huat with an unchanged TP of RM1.64, based on 7x on our CY19E core EPS.

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; 6) further strengthening of the RM against the US$; and 7) weaker economic growth in key export markets curbing demand.

Source: Affin Hwang Research - 26 Sept 2018