We are issuing a “Not Rated” call on AHB with a FV of RM0.20, based on 1.0x FY18E BVPS. AHB had exited PN17 status and has begun recording profits since 2015. While management has guided on directions that should benefit the group in the short-term (i.e. projects on hand, cheaper but higher-margin products, expansion in overseas dealership base), we are conservative with the group’s high forex exposure, dependency on large clients and lack of dividend.

Out from PN17 status. AHB is the manufacturer of the Artwright brand of wood-based furniture and office workstation products. The company has a client base in regions ranging from America and Middle East, with the latter contributing c.70% of group sales. In April 2016, AHB had successfully uplifted its PN17 status into which it was admitted in 2014 due to external audit uncertainties of subsidiary financial consolidation.

Red to black. (Due to changes in FYE from June to March in 2015, 12- month period ending March are used to compare past performances) Cash flow constraints during 12M14 brought a decrease in marketing and promotional activities. Coupled by softness in the export markets which contribute c.85% of the group’s sales, revenue slumped to RM12.9m (- 17.4% YoY). Alongside large amounts of trade receivables being written off (c.RM10m), AHB closed 12M14 with a net loss of RM8.3m as opposed to 12M13’s net loss of RM2.4m.

For 12M15, the group’s business turned around as sales improved to RM13.8m (+12.6% YoY) thanks to favourable exchange rates. Net earnings returned into the black as operating expenses avoided large impairments as in the previous year, yielding a net profit of RM1.1m. Meanwhile, with the help of stronger USD rates, FY16 generated sales of RM16.7m (+20.3% YoY) and net profit of RM2.0m (+81.6% YoY).

Is the patch getting greener? With new local refurbishing projects in hand, the group is poised to see some much-needed boost in sales in the shortterm. In addition, management has implemented initiatives to increase its dealership base in countries which the Artwright brand has notable presence such as India and Vietnam. Furthermore, the introduction of lower-priced products with better margin yield could further boost group earnings growth. Considering the above, we expect FY17E/FY18E sales to generate close to RM20.4m/RM22.8m (+22.3%/+12.1% YoY) and stronger net earnings at RM2.2m/ RM2.4m (+27.1%/+10.9% YoY).

Heavy exposures. In lieu of the group’s large proportion of export-based clients, the group is exposed to high levels of forex risk against USD rates. Additionally, based on historical performances, the group’s two largest customers appeared to have contributed c.87% of total revenue. This high level of dependency may have an adverse effect to group sales in the event orders from either customers are reduced in the future.

No dividend payment is expected as the group currently record retained losses of c.RM27.0m as at FY16 which was accumulated during its lossmaking years in the late 1990s.

Not Rated with a fair value of RM0.20, which is 1.0x PBV (in line with the Fwd. PBV of FBMSC) of its RM0.20 FY18E BVPS. We chose to value the stock based on PBV valuation as compared to PER as the stock has been trending steadily across a PBV range as compared to a PER range, which was distorted due to its previous loss-making periods. This valuation appears to be at a c.30% discount from industry peers. However, we believe the discount is fair given its: (i) high exposure to forex risks, (ii) sizeable customer concentration risk, and (iii) lack of expected dividend payments.

Source: Kenanga Research - 13 Sep 2016