Poh Huat’s 9MFY19 core net profit of RM37.4m (+39% yoy) came in broadly within our expectations. Shipment of furniture from both the Malaysia and Vietnam operations remained sturdy on the back of sustained orders from its US customers. We leave our earnings forecasts unchanged as there is no major surprise in the results. Our 12-month TP is unchanged at RM1.48 (based on a FY20E PER of 6.8x). We maintain our HOLD rating, in view of a potential marginal downside of 0.7%, after taking into account a dividend yield of c. 5%.

9MFY19 Core Earnings at RM37.4m, Broadly Within Expectations

Poh Huat registered a 17.7% yoy higher 9MFY19 revenue of RM508.9m, on the back of increased shipment of furniture from both its Malaysia and Vietnam operations. The Malaysia operations posted sales of RM240.9m (+26% yoy), as its panel-based bedroom set continued to be well-received by new and existing US customers. For its Vietnam operations, revenue stood at RM268.1m (+11% yoy), also attributed to increased orders from US customers. Meanwhile, the EBITDA margin for 9MFY19 improved to 9.9% (+2ppt), mainly as a result of better manufacturing efficiency from increased production. Excluding one-off items, 9MFY19 core net profit came in at RM37.4m (+39% yoy), accounting for 70% of our FY19 forecast. We deem this as broadly in line, given 4Q is expected to be a much stronger quarter given the pre-festive year-end spending in the US.

Better Sequentially Coming Off a Seasonally Low 2Q

On a qoq basis, revenue and core net profit increased by 12% and 29% to RM164.8m and RM12.4m respectively. The improvement in turnover was partly due to production normalising post the local festive season in the preceding quarter. EBITDA margin expanded by 0.5ppt qoq to 9.8%, largely on the back of better labour efficiency and absorption of factory overheads, particularly in its Vietnam operations.

Maintain HOLD With An Unchanged TP of RM1.48

Given no major surprises in the results, we leave our FY19-21 core EPS forecasts unchanged. We note that although Poh Huat may see increased opportunities as a result of the US-China trade war, we think that stiffer competition from the influx of Chinese manufacturers, especially in Vietnam, may partially negate the full benefits from the trade diversion. As such, we maintain our HOLD call on Poh Huat with an unchanged TP of RM1.48, based on 6.8x the CY20E core EPS (3-year mean PER). Nevertheless, the dividend yield of c.5% on our estimates, looks attractive.

Key Risks

The upside/downside risks to our HOLD rating would be: 1) a major increase/decline in the supply of rubberwood; 2) a substantial decrease/increase in raw-material prices and labour costs; 3) a substantial improvement/drop in furniture exports; 4) favourable/unfavourable policies curtailing furniture exports; 5) a sharp increase/drop in ASPs for furniture products; 6) a weakening/strengthening of the RM against the US$; and 7) stronger/weaker economic growth in key export markets.

Source: Affin Hwang Research - 23 Sept 2019