FURNITURE manufacturer Jaycorp Bhd is one of the companies that are thriving in the Covid-19 economy. Tightening international border controls and a ban on interstate travel in response to the pandemic have led to a reversal in the company’s fortunes as people spend more time in their homes and money on home furniture products.
Backed by strong orders, the company is confident of beating its previous earnings record of RM24.69 million achieved in its financial year ended July 31, 2017 (FY2017). In fact, Jaycorp’s net profit of RM22.45 million for 1HFY2021 has exceeded that for the past three financial years (FY2020-FY2018) of RM17.4 million, RM19.82 million and RM10.29 million respectively.
Its executive director Muaz Jema Anton Khan expects the company to report its “best-ever year” as earnings have improved substantially amid the Covid-19 stay-at-home orders.
“The local market has been good because of the pandemic. [That’s because] a large chunk of disposable income now goes to home furnishings instead of being used for travelling, as people are stuck at home. This is very different from pre-pandemic,” Muaz tells The Edge.
Still, the Covid-19 outbreak had initially impacted Jaycorp’s earnings when the first Movement Control Order (MCO) was imposed in March last year, forcing the company to temporarily shut down operations. As a result, Jaycorp saw its net profit fall 12.2% to RM17.4 million in FY2020 from RM19.82 million in FY2019, while revenue was down 3.9% to RM309.35 million from RM321.95 million in the same period.
The weaker performance in FY2020 was also because of its kiln-drying segment posting a pre-tax loss of RM3.39 million versus the pre-tax profit of RM339,000 in FY2019 as a result of a write-down of inventories in the Malaysian subsidiary and a provision for employee benefits and tax penalty expenses in the Indonesian subsidiary.
Muaz explains that it was quite difficult for Jaycorp’s customers to physically look at its products or new models given the lockdown, adding that its major markets are Japan and South Korea.
“Customers generally want to come to the factory and see our products, particularly the new models. But we’ve adapted by having a digital showroom now. The pandemic has actually shown us that we need to modernise our operations.
“As such, we’ve become much more proficient in delivering our value proposition online even though some of our factories are quite remote,” he says.
The company also works closely with its customers in terms of product development. “We’re always trying to go up the value chain … trying to do higher-margin products and also looking at what is selling, as well as the market trends. At the same time, we will also try new designs and see how that works,” he adds.
Last month, Jaycorp had to halt operations at two of its factories in Johor for 10 days for sanitisation purposes as some of its employees tested positive for Covid-19. Muaz, however, says the temporary shutdown will not have any material impact on the company’s financial performance. “There will only be a delay (in orders), but I think we will be able to catch up quite quickly.”
While orders and queries from customers are robust, Muaz says it is difficult to gauge whether the trend will last until after the pandemic. “For instance, my consumption of delivery food has increased a lot, but once we come out of the pandemic, am I going to stop ordering food? No, I actually think I would probably order slightly more than I did before the lockdown because we already have that sort of behaviour ingrained in us.
“So, I don’t think there will be a massive drop (in sales), but it is hard to say.”
Expanding manufacturing capacity on the cards While Muaz notes that Jaycorp is open to taking new orders, the manufacturing capacity of its furniture division is already running at over 90%. Thus, it is “quite difficult” now to take on new customers that have substantial volume orders, he says.
“We are always looking at expanding our capacity, but I think, given the current situation, the priority is shifting towards automation.
“Traditionally, the manufacturing business has been quite labour-intensive, so we are looking at new technologies that could essentially reduce the manpower,” says Muaz.
Jaycorp has set aside RM5 million to RM6 million in capital expenditure (capex) mainly for the purchase of new machines, which will be funded via 70% internal funds and 30% borrowings.
As at Jan 31, 2021, Jaycorp had a cash balance of RM52.57 million and borrowings of RM27.42 million, leading to a net cash position of RM25.15 million.
Muaz says the company will be cautious about spending as the uncertainty will linger for some time. “We are open to any merger and acquisition for our furniture division, but it will depend on the valuation and what capability the (acquisition target) can bring to the group.”
Setting a dividend policy Despite not having a dividend policy, Jaycorp has been consistently pay
Not bad at all .... losses only from kiln drying. The other manufacturing businesses remained profitable even though closed for 2 out of 3 months due to lockdown! This quarter should be better with manufacturing back to production since end Aug (i.e. will be operating for 2 out of 3 months in this current quarter). Management must be confident of recovery to declare 5.5 sen final dividend.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....