In tandem with the popularity towards affordable and ready-to-install furniture, we expect demand for Poh Huat’s panel-based furniture to remain robust. On the flipside, we think its Vietnam operation will face headwinds due to intensifying competition. All in, we cut our FY20-21E earnings forecasts by 11-20%, whilst maintaining our FY19E forecast, as we foresee a challenging environment for Poh Huat’s Vietnam ops moving forward. Given limited upside to our new TP of RM1.48, we downgrade Poh Huat to HOLD from Buy.

Furniture Exports Rose 6.4% Yoy to RM3.4bn in 4M19

According to METS, Malaysian furniture exports increased by 6.4% yoy to RM3.4bn in 4M19. In particular, exports to the US surged to RM1.3bn (+18.7% yoy) for 4M19. We think that demand from US customers should remain healthy (accounts for c. 92% of FY18 Poh Huat revenue), underpinned by higher new and existing home sales, robust employment data and trade diversion from China as a result of trade tensions.

Increasing Demand for Panel-based Furniture

We expect the strong momentum for panel-based sets to continue, as more furniture distributors in the US are offering panel-based products as an alternative to the higher-end solid wood products due to a shift in consumer preference. We believe that Poh Huat Malaysian ops will benefit from this as they specialise in the manufacturing of panel-based furniture products. Nevertheless, any further production ramp-up may be capped given the manufacturing plant is already running at close to full capacity.

Challenges at the Vietnam Operation, Updating Its Product Mix

Poh Huat’s Vietnam ops, which specialise in solid-wood furniture products, are seeing margin erosion due to higher raw-material and labour costs, shifts in product mix and stiffer price competition. Poh Huat has been adjusting its product mix in order to stay ahead of its competitors and to sustain its client base.

Downgrade to HOLD at a Lower TP of RM1.48

We revise downwards our FY20/21E earnings forecasts by 11-20%, whilst maintaining our FY19E forecast. This is largely to factor in the intensifying competition for Poh Huat’s Vietnam ops moving forward. Our TP is revised lower to RM1.48, based on a target PER of 6.8x (latest 3-year average; revised from 7.2x) on CY20E core EPS. At 6.5x FY19E EPS, we believe Poh Huat is trading at fair value, considering the potential risk to earnings moving forward.

Source: Affin Hwang Research - 16 Jul 2019