* As of 24/03/17 (Source: Morningstar)

YoY, the quarterly revenue increased by 5.4% while underlying net profit decreased by 17.8%. The management explained it was due to the determination of ‘additional bonus’ which is pretty vague. Six Months Net profit margin decreased from 8.54% to 6.66% while free cash flow margin down from 17.14% to 14.79%. Despite its heightened uncertainty of the trading outlook surrounding Trump’s protectionism policy, the firm has declared a high dividend (which translates into a dividend yield of above 7%) and has weakened its cash flow profile. Though free cash flow positive (H1 FY17), it is insufficient to fund the generous dividend distribution. Based on FY16 financials, the company has exposure to the North America of approx. 27% hence Protectionism represents a material risk.

The primary growth of furniture importing is still driven by the US which has seen its attractiveness decline due to Trump’s protectionism policy. A border tax would, inevitably, hurt retail sales but dropping the tax rate will, to some extent, neutralise the overall impact. Overall, we believe that in the long run, it will incentivise the US companies to relocate jobs back to the US but in short to medium term, the relatively low production costs in the emerging markets is still attractive.

However, APAC countries are expected to see a higher consumption growth relative to other regions.

We see that the deleveraging is taking place, and Jaycorp has reduced its USD denominated borrowings from RM4.1m (Q1 FY17) to RM1.6m (Q2 FY17). For exchange rate risk management, the company usually matches the sources of funds with the uses of funds (to avoid any currency mismatch). We speculate that the reason could be due to the company is preparing to scale down the US operations (perhaps expecting a slowdown). This is a question worth asking the management.

We have performed a relative valuation and added Homeritz Corp to our sample size. Based on the above, we believe that Jaycorp is reasonably priced at RM1.46. The data is from what we consider to be reputable (Morningstar and Gurufocus). We revised our target price from RM 1.50 to RM 1.46 and based on the last closing price of RM 1.36; we believe the upside potential is c. 7% hence we maintain our Neutral rating given the lack of near-term positive catalysts and limited upside.

Disclaimer: The views above are opinions based on facts and subjective judgements. Yield Mountain (including the contributors) does not take any responsibility (be in monetary or non-monetary) for any actions rely on the information discussed.