Wegmans Holdings Berhad (WEGMANS) will be raising RM29.0m with a market capitalisation of RM145.0m. The proceeds arising from the IPO is mainly for CAPEX expansion, which includes new factory and accompanying facilities. With the expectation of capacity growth alongside the group’s strength in design, we foresee stronger numbers in FY19. With targeted FY19E PER range of 9.5x- 10.0x, we derived our fair value range of RM0.310-RM0.330.

WEGMANS – furniture maker famed for unique design, particularly in home furniture products. With strong designing capability, its products are well sought by the market and exported across countries and continents. The top four exposures of WEGMANS are Japan, United States, United Kingdom and Australia (collectively account for 67% of sales), being countries where home furniture imports are forecasted to continue growing.

Specialist of dining. WEGMANS is positioned as a dining furniture specialist, specifically dining chairs and dining tables. Its in-house design and development team continuously introduces and incorporates new designs into its broad collection of products through innovative use of high quality solid wood, composite wood and fabrics. Products quality is closely controlled by stringent ISO 9001:2008 compliant quality management system.

Fund-raising to double capacity. WEGMANS expects to raise RM29.0m based on 100.0m new shares at IPO price of RM0.29/share. The IPO proceeds will be utilized mainly to fund phase 1 new factory along with its accompanying facilities. The factory could double its production capacity thus supporting a more aggressive business growth. In addition, we believe productivity would also be enhanced through the said expansion plan as machineries and equipment with better efficiencies and functionality could be purchased for installation.

Earnings forecast. We expect flattish revenue in FY18 owing to: (i) current production capacity approaching full utilization, and (ii) lower export conversion due to stronger ringgit; prior to a surge in revenue underpinned by heightened capacity from new factory. Meanwhile, sales and marketing cost are expected to trend higher in tandem with the effort to build greater brand awareness as the group expands. All in, we expect the group’s core PATAMI to dip by 18.9% in FY18 to RM11.8m prior to a surge of 39.4% in FY19 to RM16.4m (on the back of 30.4% revenue growth underpinned by higher factory’s production capacity). Although management has yet to outline the dividend policy, we expect WEGMANS to continue rewarding its shareholders. By assuming a more sustainable dividend pay-out ratio of c.40% (near average payout ratio of FY15-16 period which the group was still a private company), WEGMANS is expected to reward 1.0/1.3 sen to shareholders in FY18/19E, translating into 3.4%/4.5% dividend yield.

Target price of RM0.31-RM0.33 based on targeted FY19 PER range of 9.5x-10.0x. We reckon our applied PER valuation is fair as it is priced within +0.5SD from the average forward PER experienced by its closest peer, HOMERITZ. The group’s prospect of high growth momentum upon doubling its production capacity is supportive of the richer valuations.

Risks to our call include: (i) weaker-than-expected USD/MYR and margins, and (ii) slower-than-expected progress in phase 1 development.

Source: Kenanga Research - 6 Mar 2018