We expect Poh Huat’s revenue to increase in FY19-20E on the back of strong furniture product demand, especially from the US. The group has continuously adjusted its product mix to meet the change in consumer preferences. While partially mitigated by rising production costs, mainly due to higher raw material and labour costs, we raise our FY19/20E core net profit by 4.5%/3.4%. We reaffirm our BUY call on Poh Huat with a higher TP of RM1.71.

Demand Coming in From the US

The ongoing trade dispute between the US and China is turning Malaysian furniture manufacturers more competitive vs. those in China. Poh Huat stands to benefit from this as it has good relationships with US buyers (c.90% of sales). Poh Huat’s current forward orders run to March-April 2019.

Adjusting Its Product Mix to Meet Consumer Tastes

The group has been updating and adjusting its product mix, mainly to meet the change in consumer preferences towards the middle and affordable products from high-end products previously. On top of that, at the Vietnam operations, where competition is intense due to the rising number of furniture makers, Poh Huat has been trying to introduce more unique and differentiated furniture products that other furniture makers are not able to copy, and which is helping to keep orders resilient.

Potentially Venturing Into Online Furniture Market in Australia

Currently, the group is in talks with an Australian company that sells furniture products online. The contribution from this venture is likely to be small, nevertheless, if Poh Huat manages to purchase the Australian company, this could be the group’s first foray in tapping the Australian furniture market.

Raising Core Net Profit by 4.5%/3.4% for FY19/20E

We lift our FY19/20E core earnings for Poh Huat by 4.5%/3.4%, mainly due to stronger US demand, but partly offset by rising production costs from higher raw material and labour costs. We reaffirm our BUY call on Poh Huat and lift our 12-month TP to RM1.71 (from RM1.64), based on a PER of 7.2x applied to our CY19E core EPS. We believe Poh Huat will continue to adjust its product offering to meet the changes in demographics and market trends. Also, we believe Poh Huat stands to benefit from the US-China trade war.

Higher demand coming from the US

Furniture Products Included in the Recent US Tariffs on China

In September 2018, the US levied tariffs of 10% on USD200bn worth of Chinese products, which included furniture. This tariff rate is set to increase to 25% by year-end, barring a breakthrough in the trade talks between the two countries.

Demand coming from the US

The ongoing trade dispute between the US and China is turning Malaysian furniture manufacturers more competitive against those in China. This has resulted in the US buyers coming to Malaysia to source their furniture products. Poh Huat is benefiting from this as they already have an existing good relationship with the US, given that the US and Canada are their main export markets, contributing c.90% of the group’s total sales. Currently, Poh Huat’s forward orders are filled up to March-April 2019.

Intense competition in Vietnam

The number of furniture companies in Vietnam has been increasing over the past few years. More Chinese owned manufacturers are opening-up or shifting their production facilities from Southern China to Vietnam, partly due to China’s clampdown on pollution. Due to this, there is intense competition in terms of getting labour as well as providing differentiated products to the consumers.

Adjusting Its Product Mix to Meet Consumer Tastes

The group has been updating and adjusting its product mix, mainly to meet the change in consumer preferences towards the middle and affordable products from high-end products previously. For its Vietnam operations, where competition is intense due to the rising number of furniture manufacturers, Poh Huat has been trying to introduce more unique and differentiated furniture products that other furniture manufacturers are unable to copy (for example in terms of design or methods of finishing the furniture surface), which has helped to keep orders resilient, especially for Poh Huat’s main export markets.

Potentially Venturing Into Online Furniture Market in Australia

To recap, Poh Huat had earlier intended to expand into Australia by setting up a warehouse and showroom. However, the lack of a synergetic local partner prompted management to instead hold its current property portfolio for rental purposes instead. Currently, the group is in talks with another Australian company that sells furniture products online. The contribution from this venture is likely to be small for the group, nevertheless, if Poh Huat manages to purchase the Australian company, we are of the view that this could be the group’s first step in tapping the Australian furniture market.

Revenue to Increase Attributable to Strong Demand

We expect Poh Huat’s revenue to increase in FY19-20E to RM703-713k from RM613m in FY18E, mainly underpinned by higher contribution from the Malaysian operations given the increase in demand for furniture products, especially from the US.

Managing Production Costs

For Poh Huat, its manufacturing costs have increased mainly due to an increase in raw material and labour costs. For FY18E, we expect raw material costs for both Malaysia and Vietnam to be c.60% of total sales, up from 56% in FY17, partly due to an increase in rubberwood prices given the global shortage for it. Meanwhile, direct labour costs for Malaysia and Vietnam are expected to be c.8.5% and 17% of total sales, respectively, from 7.8% and 16% in FY17, due to an increase in minimum wages.

Valuation and Recommendation

Raising Our Core Net Profit by 4.5%/3.4% for FY19/20E

We maintain Poh Huat’s FY18E core net profit but raise our forecasts for Poh Huat’s FY19/20E core earnings by 4.5%/3.4%, mainly to take into account the stronger demand from the US but partially offset by the increase in production costs due to higher raw material and labour costs.

Reaffirm BUY Rating; Raising Our TP to RM1.71

We believe Poh Huat will continue to adjust its product offering to cater to the changes in demographics and market trends. Also, we believe Poh Huat stands to benefit from the US-China trade war since the tariffs imposed by the US on China-sourced furniture are turning Poh Huat’s furniture offering more competitive against that of its China-based peers. We reaffirm our BUY rating on Poh Huat with a slightly higher 12-month TP of RM1.71, based on an unchanged 7.2x target PER applied to our CY19E core EPS.

Key risks

The downside risks to our BUY rating would be: 1) a major cut in the supply of rubberwood; 2) a substantial increase in raw material prices and labor costs; 3) a 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, which would serve to curb demand for Poh Huat’s products

Source: Affin Hwang Research - 7 Nov 2018