In a recent meeting with management, we understand Signature’s order book has increased 40% to FY188mn in FY19. This could mean the worst is over for the company. Although the order book has increased substantially, it has not captured any contracts for HOC homes. To revitalise retail sales, the group has acquired a software, which would allow the company to “customise” the entire home according to customer preferences. In terms of profit guidance, management believes 4 factors, i.e.: increase in order book and completion of low-margin jobs, change in supply chain, improvement in asset quality and cost-cutting initiatives, to play out in FY20 to fuel earnings growth. Maintain Buy with an unchanged target price of RM0.60.

Order book recovery

Order book recovery. Signature closed its FY19 with an order book of RM188mn, comprising new jobs with values ranging from RM1mn to RM26mn. This was 40% higher than RM134mn order book as at FY18. The surge in order book may indicate that the worst is over for the company.

HOC orders not coming in yet. We both believe that Signature will indirectly benefit from the increase in property sales during the Home Ownership Campaign (HOC) period. The company is expected to see new project orders coming in after 2 years and possibly increase in retail sales when the construction of HOC homes is completed 3 to 4 years from now. According to management, the increase in order book to RM188mn did not capture any contracts for HOC homes. The contracts awards for new projects would usually come when project milestones reach 50% and above. In order words, the award of kitchen system contracts for HOC homes would possibly come from 2021 onwards.

Revitalising retail sales

New products. In our last report, we highlighted a new product series launched by the company to revitalise its retail sales, which declined to RM42.8mn in FY19 from FY16-18’s average of RM50mn. Also, the new product series, in terms of storage space, design and colour, is a total revamp of old series, which would allow the company to differentiate from its peers.

Digitisation of retail sales. Recently, the company has acquired a software, which would enable the company to ‘customise’ the entire home, not just kitchen, according to customer preferences. Essentially, this software, which has enormous amount of data in the library, can offer a new home made-over without changing the structure of the property. According to management, the customer will just need to provide a floor plan and the software can then recommend all kinds of interior designs with pricing for the customer to consider. Using this software, the customer can add or delete any items from TVs, sofa, wallpapers, curtains, sanitary wares to any decorative items to the cart and will know the total costs instantly. In order words, with the help of this software, Signature can be an interior designer too. All in all, we are positive on the company’s effort in keeping abreast of the change in technology and staying ahead of the curve in terms of product innovation and customer satisfaction. In terms of forecast, we project FY20/21/22/23 retail sales to improve gradually to RM45.3/46.7/48.1mn.

4 factors to drive FY20 earnings higher

FY20 margin to improve. According to management, 4 factors are expected to improve Signature’s FY20 profitability. First, the increase in order book, coupled with the completion of low-margin projects, are expected to boost FY20 profit and margins. Next, the change in supply chain, where the company has started engaging directly with suppliers of raw materials could offer some leeway to margin improvement and inventory management. Third, the impairments and write-offs made over the past few years would improve asset quality. This would translate into stable margin if not higher in FY20. Last but not least, the cost rationalisation program initiated since FY18 by reducing headcounts and lowering overhead expenses would continue to play out in FY20 to fuel earnings growth.

Impact

Taking into account the 4 factors above, we project FY20 earnings to grow by 121% to RM11.3mn. The strong earnings growth is also partly due to low base effect as FY19 core profit was affected by declines in revenue and margin.

Valuation

We maintain Signature’s target price at RM0.60/share, based on 0.8x FY20 NTA/share. Despite the weak FY19 results performance, Signature share price surged by 49.3% YTD. We think this is not unjustifiable given its strong balance sheet quality. Furthermore, the recent active share buybacks by the company indicates Signature’s shares could be undervalued. As such, we maintain our Buy recommendation on Signature.

Source: TA Research - 10 Oct 2019