Posted by Kim Yap Lau > 2013-11-05 10:38 | Report Abuse

How abt Hevea?

Posted by jiehan > 2013-11-05 10:43 | Report Abuse

hi mr chong, could you also include Eurospan in comparison to those furniture companies. Eurospan's performance is improving and has very lean balance sheet.

Posted by kcchongnz > 2013-11-05 10:47 | Report Abuse

This was a e-mail to me from a good fundamental investor some time ago for your information. I concur with his views about Hevea.

KC,

What is your view between HOMERITZ vs HEVEABOARD which I recommended to you a few months back. HEVEABOARD is in the same business except that it also produces particle boards besides furniture. You used fcfe valuation for heveaboard and came up with intrinsic value of RM1.41 which presents a larger margin of safety than HOMERITZ.

However comparing a few things between these 2 companies, I feel that HOMERITZ is a better value because :-
1. Balance sheet is stronger, no debts vs a high D/E for Heveaboard
2. Higher margins than HEVEA
3. Better ROIC, FCF/sales, lower EV/EBIT
4. Better dividend yield
5. Particleboard manufacturing involves higher capex, is more like a commodity hence poorer margins.

Plus side for HEVEABOARD
Less competitors compared to furniture makers due to higher entry cost and high capex. The demand for particleboard would be more widespread as it is used as a raw material for house renovations, construction industry whereas furniture.

Posted by sense maker > 2013-11-05 12:05 | Report Abuse

Eurospan stopped giving dividends after the bumper 40sen payments in 2010. Shareholders have not been getting any dividend for the last 3 years. It is a very small company but the margins have been well maintained in the past few years. With 44m shares, RM1m to RM2m net profit after tax is impressive enough but equally it is nearer to loss should there be any cost overrun. All in all, I like Eurospan. All furniture companies are now moving.

Posted by garlic > 2013-11-05 13:03 | Report Abuse

Homeritz revenue rely heavily on the export market especially from US (19%), Eurozone (39%), Asia Pacific (43%) for year 2012, these 3 geographical segments alone contribute to about 87% to the company revenue FY2012

the weakening of MYR against all these major currency will do a lot of good to this counter, while the strengthening of MYR against these major currency will do opposite effect.

furniture directly related to property business. property business down = furniture business down, property boom = furniture boom. US & Eurozone properties business coming back? Asia Pacific region- I read measurements to cool off property sector from Singapore, China to HK ....

they are listed back at the end of year 2009, 4 years track records. if only they were listed a little bit longer period, the confident level towards this counter will be a lot of different

Posted by kcchongnz > 2013-11-05 17:05 | Report Abuse

Posted by jiehan > Nov 5, 2013 10:43 AM | Report Abuse
hi mr chong, could you also include Eurospan in comparison to those furniture companies. Eurospan's performance is improving and has very lean balance sheet.

Eurospan is a very smallish company compared with the rest. Its market capitalization is only 24.7m. It has relatively higher gross margin. However due to its very small turnover of just 61m, and hence higher percentage in operating cost, its net margin at only 5.1%, is very much lower than the rest.

As a result, its ROE and ROIC is also relatively low at 7.3% and 9.7% respectively. This operating numbers do not meet my personal requirements.

Its market valuation with PE ratio of 7.6 and EV/Ebit of 4.7 is also inferior to others.

However, Eurospan's first quarter result appears to be very good at 3.5 sen per share. As for the rest of the year, it may be too early to say. So for me, I prefer the rest than Eurospan.

Posted by jiehan > 2013-11-06 08:15 | Report Abuse

thank you kcchongnz.

Posted by haikeyila > 2013-11-06 17:30 | Report Abuse

clear and concise comparison. bravo.

Posted by mmk79 > 2013-11-15 08:13 | Report Abuse

detailed analysis, hope I can learn more from you kcchingnz.

Posted by kclow1 > 2013-11-30 20:38 | Report Abuse

updated based on latest rolling 4qtr

Market statistics Homeriz Lii Hen Latitude
Price 0.57 1.65 1.55
No of shares 200000 60000 97208
Market capitalization 114000 99000 150672
Minority interest 5855 119 49484
Total debts 2672 17557 91269
Excess cash 34710 43333 118695
Enterprise value, EV 87817 73343 172730
Revenue 112905 311615 531061
Profit before tax 20566 20148 44171
Net Income 17941 16417 29952
Net Profit Margin 16% 5% 6%
PE 7 6 5
EV/Ebit 4.3 3.6 3.9
EV/Sales 0.78 0.24 0.33

thanks kcchongnz for sharing

Posted by kcchongnz > 2013-12-09 11:24 | Report Abuse

A month has passed since I wrote a comparison of three furniture companies in Bursa, they are Homeritz, Latitude and Lii Hen. I have stated my preference on Homeritz due to its high margins, efficiencies and reasonably priced as compared to others.

Since then Latitude has released its latest quarterly report on 30/9/2013. Its revenue and net profit for the first quarter 2014 jumped by 27% and 63% to 531m and 30m respectively. The market also reacted positively with its share price rises by a whopping 38% from RM1.31 to RM1.81 at the close on 8/12/13. What a windfall for shareholders of Latitude. Another furniture company, Poh Huat also rode on the wave and its share price increased by 25% from 73 sen to 91 sen. Not sure why was that so as Poh Huat’s financial results are not impressive at all. On the other hand, the share price of Homeritz and Lii Hen remain unchanged from the same period.

Let us review the comparison on investing in those furniture companies again with the updated results. Also included are another four more furniture companies; Hevea, Eurospan, Poh Huat and Tafi.

Market valuation
First we examine which has the cheapest market valuation of all the furniture companies here with their latest prices and their twelve months trailing financial results as at 8th December 2013 as shown in Table 1 below:

Table 1: Market valuations of furniture companies
Company Homeriz Lii Hen Latitude Eurospan Hevea Poh Huat Tafi
Price 0.575 1.650 1.810 0.510 0.950 0.910 0.270
PE Ratio 7.7 5.9 4.3 6.8 4.2 5.9 NA
EV/Ebit 4.3 3.4 3.7 3.3 7.1 4.2 NA
EV/Ebitda 3.9 2.8 2.7 3.0 3.6 3.1 5.4

All except Tafi were making good profit for the past one year. We will rule out Tafi as an investment option because of its losses. They are selling cheaply too as all PE ratios are single digit with the lowest at 4.2 for Hevea and Latitude. Homeritz appears to be the most expensive at 7.7. In term of enterprise value, Hevea appears to be the most expensive at EV 7.1 times it Ebit. This is mainly due to its heavier debt burden. For the rest, EV is not much different from each other and they are all in a very low and tight range of 3.3 to 4.3 Ebit and 2.8 to 3.9 times Ebitda. However, Lii Hen and Latitude appeared to be the preferred choice as far as market price is concerned. Let us look at their operation performance for the past one year to see which company is indeed a better investments.
Margins and efficiencies

Table 2 below shows the margins of the business of each furniture company.

Table 2: Margins of furniture companies
Margins Homeriz Lii Hen Latitude Eurospan Hevea Poh Huat Tafi
Gross Margin 45.0% 15.1% 15.3% 21.1% 13.4% 16.7% 14.5%
Operating Margin 18.3% 6.7% 9.1% 5.7% 7.0% 5.7% -1.6%
Net Profit Margin 15.9% 5.3% 7.4% 5.6% 5.5% 3.8% -0.3%

All furniture companies have low to moderate gross margin in the teens and operating and net profit margin in the higher single digits. The exception is Homeritz with each of its margin from double to triple of the rest. For example its gross margin is 45%, three times that of Laitude and Lii Hen. Net profit margin shows the same difference. Thanks to its niche which differs from others in its design and manufacture of upholstered home furniture. It also has its own brand Eritz. Homeritz high margin business has return on invested capital in ROE and ROIC of 21% and 30% respectively, outperformed the rest of the furniture companies by a wide gap as shown in Table 3 below.

Table 3: ROE and ROIC of furniture companies
xxxxx Homeriz Lii Hen Latitude Eurospan Hevea Poh Huat Tafi
Net profit margin 15.9% 5.3% 7.4% 5.6% 5.5% 3.8% -0.3%
Asset turnover 1.1 1.6 1.1 1.2 0.9 1.5 0.5
ROA 17.3% 8.6% 8.5% 6.5% 5.2% 5.7% -0.1%
Leverage 1.2 1.3 1.5 1.2 1.8 1.6 1.1
ROE 20.6% 11.4% 13.1% 7.8% 9.3% 9.3% -0.2%
ROIC 29.9% 14.5% 16.7% 11.5% 8.5% 9.8% 4.8%

Two other companies, Latitude and Lii Hen also garnered ROE and ROIC comfortably above the cost of capitals above 10%, while the rest are marginally acceptable with the exception of Tafi. Wondering why some people chose Tafi. They must have something we don’t know.

Conclusions
Taken all into considerations, I still favour Homeritz as the top pick in furniture company to invest in. Although it has a slight higher enterprise value over its ebit, its margins and operational efficiencies are way above the rest. My personal top three ranking of the market valuations is as follow based on their respective market price now:

1. Homeritz
2. Latitude
3. Lii Hen

So which furniture company do you favour as an investment?

KC Chong in Auckland (8/12/13)

Posted by Iching88 > 2013-12-18 20:49 | Report Abuse

Bought latitude as cold eye is shareholder of this comp.

Posted by iWarrants > 2013-12-19 20:39 | Report Abuse

dear kcchongnz, may i know how to you get your EV? i been trying different numbers, cant get your 3.9 for homeriz, thanks in advance

Posted by kcchongnz > 2013-12-20 05:33 | Report Abuse

The 3.9 you mentioned is the EV/Ebit, not EV. For computation of EV, please refer to the following link:

http://klse.i3investor.com/blogs/kianweiaritcles/37729.jsp

Ebit is the earnings before interest and tax. For Homeritz, it was 20.7m last financial year. EV I got is 104.8m. It changes because of the market capitalization affected by the changing share price. For its latest price of 65.5 sen now, the computation is shown below:

Market statistics Homeriz
Price 0.655
No of shares 200000
Market capitalization 131000
Minority interest 5855
Total debts 2672
Excess cash -34710
Enterprise value, EV 104817

Ebit 20703
Earnings yield, Ebit/EV 20%
EV/Ebit 5.1
EV/Ebitda 4.5
EV/FCF 5.9
EV/Sales 0.9

Posted by nokenzo > 2014-02-05 20:56 | Report Abuse

Hi kcchongnz, for ROIC homeritz, you got 29.9%. From my calculation, I obtained 25.35% as follows:
Homeritz
ROIC 2012 NOPAT 14,699,677
PPE 35,315,119
Receivable 7,078,371
Inventories 22,951,687
Payable 7,368,184
ROIC 25.35%
Can you please enlighten me what went wrong?

Posted by kcchongnz > 2014-02-05 21:29 | Report Abuse

nokenzo,
There is nothing seriously wrong about your computation of ROIC for Homeritz except that you are using the audited account for 2012, whereas i used the latest unaudited account ended 31 March 2013.

check your computation of NOPAT

NOPAT=EBIT*(1-tax rate)=EBIT*[1-(Tax/EBT)]

I got ROIC of 28.5% as i tweak the Ebit a little, for example to exclude interest income etc, but it doesn't matter that much as it involves art of interpretation. Your 25.4% is close enough.

Below is the little tweaking I made for the 2012 income statement.

Revenue 103246
Cost of sales -56924
Gross profit 46322
Admin expenses -13410
Other expenses -13217
Other operating income 424
EBITDA 20119
Depreciation -2524
Profit from operation, EBIT 17595
Financing cost -166
Interest income 244
EBT 17673
Taxation -923
Net Income 16750

Attributed to:
Equity holders of the company 14700
Minority interest 2050
16750

Posted by nokenzo > 2014-02-05 22:39 | Report Abuse

Thanks, KC, shall digest your figure.

Posted by nokenzo > 2014-02-05 23:17 | Report Abuse

Got it, thanks alot, KC.

Posted by vinext > 2014-12-21 16:29 | Report Abuse

good work!

Posted by vinext > 2015-10-14 09:59 | Report Abuse

i do not know what happened but can anyone tell me?i think KKY gave rm20m or so to KC to invest,then suddenly KC is no longer his FM. AND KKY calls KC stupid, while furnitures stocks were KC top picks even long ago,but i dont see credit being given to KC! so what happened?>