Better financial performance achieved in this quarter!
Pohuat 3Q revenue and PBT has risen by 13.7% & 31.5% respectively compared to preceding year.
EPS rose to 5.09sen from 4.19sen which has improved by 21.5%!
Mentioned by Pohuat in report that Q3 has recorded a higher turnover of RM164.85 million compared to RM145.00 million recorded in the previous year corresponding quarter ended 31 July 2018. The 13.7% year-on-year increase in turnover was mainly driven by the increase in shipment of furniture from both Malaysia and Vietnam operations. In USD term Pohuat has recorded higher sales of USD39.19 million in the current reporting period compared to USD35.43 million in the previous reporting period.
However, other income has reduced drastically from RM1.79 mil in the previous period to RM0.235 mil, decreases by 86%. In this report, the management didn't mentioned on the status of the reduction, based on previous explanation in quarter report where other incomes are mainly contributed by forex. Hence, we can see that in Q3 pohuat is facing forex loss compared to previous quarter, the group was enjoying higher other income.
The group has also mentioned that malaysia operations continued to receive sustained orders for panel-based bedroom sets from customers in the US. During the quarter, Pohuat also received substantial increase in orders from one of major office furniture customers.
Vietnam operation has recorded double digit sales growth of 11.5%, driven mainly by orders from US customers who are diverting more of their orders away from China to other countries in the South East Asia. Orders now comprise a wider range of products to accommodate these US consumers.
In line with the higher turnover, our Malaysia operations recorded higher gross profits of RM16.17 million in the current reporting period compared to RM12.93 million in the previous’ year corresponding period. Gross profit margin also rose from 19.4% to 20.9% due mainly to better absorption of overheads from increased production and shipment of panel-based bedroom sets. Selling and administrative expenses, as a percentage of sales, were broadly similar for the 2 periods under review.
Higher shipment of furniture from our Vietnam plants have similarly resulted in higher gross profits of RM12.20 million in the current period under review compared to RM8.87 million in the previous year corresponding reporting period. During the reporting period under review, we enjoyed better plant utilisation rate and improved labour efficiency. The increase in gross profit margin has resulted in higher profit before tax of RM5.94 million compared to RM3.57 million in the previous year corresponding period
Compared with preceding quarter,
In Malaysia, turnover increased moderately from RM73.50 million in the preceding reporting period to RM77.43 million in the current reporting period. Despite the higher turnover, gross profits drop marginally from RM16.71 million in the preceding reporting period to RM16.17 million. Gross profit margin dropped from 22.7% to 20.9% due mainly to higher material costs, namely particle boards, furniture parts and hardware. Direct labour as a percentage of sales was slightly lower to 8.5% from 9.2% while factory overheads were broadly the same at 10.6%. The lower gross margin, coupled with higher administration expenses during the current reporting period under review have resulted in a lower profit before tax of RM8.43 million for the current reporting period.
In Vietnam, we recorded higher sales of RM87.42 million against RM73.51 million in the preceding quarter. Gross profit increased from RM8.64 million in preceding reporting period to RM12.20 million in the current reporting period. Our Vietnam operations enjoyed better labour efficiency and absorption of factory overheads which have resulted in higher gross profit margin of 14.0% from 11.7%. Raw material costs increased marginally from 58.2% of sales in the preceding reporting period to 59.4% of sales during the current reporting period due to continued escalation of raw material costs. Our Vietnam operations however recorded lower selling and administration expenses during the reporting period under review. Given the improved operational and administrative performance, profit before tax of our Vietnam operations increased significantly from RM1.87 million in the preceding reporting period to RM5.95 million in the current reporting period.
Company Prospect:
The protracted trade war has resulted in the shift in the global supply chain and bought about some positive surprises to several countries in the South East Asia region. For the global furniture trade, Vietnam is expected to benefit the most, with furniture exports increasing by 30% this year, followed by Malaysia as orders shift to these South East Asia exporters. There are now clear indications of permanent structural changes in the supply chain as more and more manufacturers relocate out of China to this region.
As part of the global supply chain, we have registered increased orders for both our Malaysian and Vietnamese operations. We have adapted our production activities to accommodate a wider range of products for our US customers. We are beginning to see improved operational results, particularly from Vietnam where we have enjoyed smoother production runs following the adjustment period. As before, we will continue to strive for better manufacturing efficiency and work with our customers to mitigate increases in raw material prices and labour costs.
Comment:
The increase in sales performance for Pohuat is mainly thanks to Trade War. Previously, the better profit margin was credited to cheaper raw material cost. However, starting Q3 with higher sales volumes have shifted from China to SEA region, demand has pushed raw material cost to escalate. The future profit margin will depend on operation management of the group to reduce overhead and man power cost.
Vietnam operation is still facing keener price competition, although sales volume has increased. It has to make sure having higher sales order to maintain profitable. Also, Vietnam operation is also facing higher raw material cost. Hence, the profit shall be determined by the effectiveness of the operation/sales process.
Next quarter should have higher sales volume based on pass history where Pohuat business is in cyclical nature. However, it can foresee that forex will remain in loss due to the fluctuation of USD/RM during coming quarter period. But the supply chain trend has shifted to SEA region, hence, it is expected that the Q4 result will remain robust. Therefore, I give a buy call on this counter.
The reason I buy in Pohuat:
From technical spec of view, the price has reached its resistance line for the major bearish trend before the quarter report was released. Price has break through MA200 and stayed above it for 3 trading days. Hence, it can assume that, for more conservative player, Pohuat is in bullish trend already. Positive crossing for short term trending, mid term trending such as MA30 and MA50 has started to trend up. However, the biggest threat is CCI has shown the slow down in upward momentum which the stock price has been bullish for a week continuously and increased as much as 12%.
I reckon that on the next trading week the price will most probably break though the major bearish trend and move in minor uptrend or sideway.
TP remain: RM1.90 with the forecast EPS for FY19 to be 23.89sen and PE maintain as 7.96.
