FY15 was a bumper year for earnings, with 229% jump in earnings being driven by growth in all divisions. While this financial year (FY16) is likely to see earnings moderating from a high base; from FY17 onwards, investors may look forward to: (i) a full-year’s contribution from the proposed acquisition of 60% in a construction company - PMSB, (ii) Starbucks’ aggressive expansion into emerging markets, which will benefit FFHB’s Manufacturing and Export segment, and (iii) synergistic benefits towards the Interior Fit-out segment (IFO). As such, we forecast FY16 earnings to contract 29.7%, before bouncing back with 119.6%/35.9% NP growth for FY17/FY18. We ascribe a FV of RM0.74 on FFHB based on 8.8x FY17E FD EPS with a NOT RATED call. FFHB is a local premier furniture company with business divisions split between Export & Manufacturing (30.4%), Retailing (7.5%) and Interior Fitout (62.2%).

Building a strong reputation. FFHB saw its FY15 revenue and earnings jumping 52.4% and 228.8%, respectively, underpinned by increase in turnover from all divisions. Notably, FFHB’s Export & Manufacturing segment (which derives 90% of its sales from Starbucks) secured the Starbucks Hong Kong and Cambodian markets, and has also commenced supply of tabletops during the year. At the same time, the interior fit-out segment secured and completed a higher number of projects, including the iconic St Regis Hotel. Higher gross margins and a lower effective tax rate also resulted in net margin increasing by 3.3ppt (from 2.8% to 6.0%).

A more diversified earnings profile. We expect lumpy demand from the Interior Fit-Out segment and a change in design requirements at Starbucks to dampen turnover for FY16. However, we believe the setback is temporary and just a blip in FFHB’s overall growth trajectory. FFHB recently proposed the acquisition of 60% equity interest (for RM33.0m) in construction company Pembinaan Masteron Sdn Bhd (PMSB) which will provide an instant boost to top line and bottom line for FY17. Note that the acquisition also comes with RM7m profit guarantee for FY16 (and an aggregate RM20m profit guarantee for FY16-FY18). More importantly, PMSB also has a sizable RM355m order book, providing earnings visibility for 2-3 years as well as being synergistic towards the IFO segment further down the line.

Leveraging on Starbucks’s foray into growing markets. FFHB is also uniquely positioned to benefit from Starbucks’s aggressive expansion plans into emerging markets such as China, India and Cambodia. Currently, FFHB has already entrenched itself as the sole vendor for kitchen tops and carcasses within a number of countries in Asia with high barriers to entry. Initiatives are already in motion to increase FFHB’s capacity, with its new production assets (commissioned in 2Q16) providing a 20-30% boost to capacity (current utilisation rate at 70%). Although we expect FY16 earning to come down by 29.7%, we are expecting a strong recovery of 119.6%/35.9% for FY17E/FY18E.

NOT RATED with a FV of RM0.74. We like FFHB for several reasons, including: (i) exciting growth prospects, (ii) strong business relationship with Starbucks, and (iii) positive synergies from its proposed acquisition of PMSB. Our main reservations are the dilutive impact from its warrants (FFHB-WB). We ascribe a target PER of 8.8x over FY17E FD EPS of 8.4 sen to derive a fair value of RM0.74, which is in-line with the industry average for small cap furniture companies as well as at a 20% discount to peer construction company KERJAYA. We believe that the valuation discount is justified, given the smaller market capitalisation and nascent track record. However, we see potential for a re-rating should FFHB deliver strong earnings performance.

Source: Kenanga Research - 23 Sep 2016