Poh Huat’s FY18 core net profit of RM44.9m (-22.8% yoy) came in largely within our expectations. More importantly 4QFY18 core earnings jumped 131% qoq on the back of higher profit from both its Malaysia and Vietnam operations. We expect earnings to continue to improve from FY19 onwards as 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 leave our FY19-20 core EPS estimates unchanged as there were no major surprises to Poh Huat’s results. We maintain our BUY rating on the stock with an unchanged 12-month TP of RM1.71.

FY18 Core Net Profit at RM44.9m, Down 22.8% Yoy

Poh Huat posted a FY18 revenue of RM621.9m, up slightly by 1.2% yoy, mainly attributable to an increase in sales by the Malaysia operations due to continued strong demand for panel-based bedroom sets for the US market as well as traditional office furniture. This was partially offset, however, by lower contribution from the Vietnam operations due to stiffer competition from manufacturers in Vietnam as well as the shift in product mix to a more affordable range of furniture, resulting in a lower sales value. The EBITDA margin for FY18 weakened by 3.7ppt to 9.1% as both the Malaysia and Vietnam operations experienced margin compression partly due to the increase in raw material and manufacturing overhead costs. Excluding one-off items, FY18 core net profit amounted to RM44.9m, lower by 22.8% yoy but largely within our expectations. Poh Huat has declared a final DPS of 2 sen, bringing the FY18 DPS to 6 sen (FY17: 8 sen).

Sequentially Stronger Core Net Profit

Poh Huat’s 4QFY18 revenue increased by 30.7% qoq to RM189.5m. The higher turnover was mainly due to higher sales from both the Malaysia and Vietnam operations. Both the PBT and core net profit for 4QFY18 increased by >100% to RM26.4m and RM19.1m, respectively.

Maintain BUY with an unchanged TP of RM1.71

We make no changes to our FY19-20 core EPS forecasts post the FY18 results. We maintain our BUY call on Poh Huat with an unchanged TP of RM1.71, based on a 7.2x PER applied to our CY19E core EPS. We believe Poh Huat will continue to adjust its product offering to cater to 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.

Key Risks

The downside risks to our BUY rating would be: 1) a major cut in the supply of rubberwood; 2) substantial increases 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 the ASPs of 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 - 13 Dec 2018