Pohuat Q4 FY20 Review

 2020 is a remarkable year for Furniture Sectors!

Pohuat reported a higher revenue achieved of RM216.72mil for the current quarter compared to RM192.08mil recorded in the preceding year corresponding quarter. Thanks to the continuous ramp up on production and shipment of furniture for both Malaysia and Vietnam operations. The sales order for current quarter under review was decent as the management highlighted the expected high demand in last quarter prospects.

As previous report, Pohuat had long dated orders from US importers and demand for home and home-office furniture will continue to be strong as the "stay and work from home" precaution is expected to prevail in the foreseeable future.  

In line with the higher revenue the group recorded a 41.5% improvement for the current reporting period with a profit before tax of RM28.17 million compared to RM19.90 million recorded in the previous year’s corresponding reporting period ended 31 October 2019.

Despite a lower revenue recorded from Malaysian operations compared to previous year corresponding quarter, it achieved a marginally higher gross profit of RM19.23 million in the current reporting period compared to RM19.03 million in the previous reporting period. Gross profit margin improved to 22.7% during the current reporting period from 21.2% in the previous year reporting period due mainly to better handling of raw materials and lower selling expense. Profit before tax was marginally lower to RM11.26 million due to forex losses of RM1.06 million against a forex gain of approximately RM0.09 million previously.

Vietnamese operations registered markedly higher gross profit of RM27.20 million compared to RM16.09 million in previous year’s corresponding reporting period. Gross profit margin improved significantly to 20.6% from 15.7% previously as Vietnamese operations enjoyed across-the-board improvement in manufacturing costs due to lower material prices, better labour efficiency and better absorption of manufacturing overheads due to the higher level of production. Profit before tax increased by 81.2% to RM17.08 million during the current reporting period from RM9.43 million in the previous year’s reporting period.

Consistent with the recovery of demand and planned inventory building by US importers for the year end festive seasons, shipment to US customers from both Malaysian and Vietnamese operations increased substantially. In Malaysia, turnover grew by more than 40% whereas Vietnam’s turnover grew by a whopping 80%. On the Group level, absolute gross profit grew 82.7%, from RM25.50 million in the preceding reporting period to RM46.58 million in the current reporting period. Gross profit margin improved from 19.2% to 21.5% on the backdrop of stable raw material prices and better overhead absorption from the higher plant utilization rate. 

Company Prospects

"A survey by the US Conference Board indicates that consumers’ assessment of present-day conditions held steady following sharp recovery in consumer confidence in September 2020. Existing home sales continued to rise in October 2020 for the fifth straight month, a remarkable achievement amidst high unemployment due to the pandemic. It is also predicted that the 2021 home sales would rise 10% which should bode well for furniture sales."

"As a key furniture sourcing point, we have benefited with more orders being received from our customers for shipments all the way until Jun / July 2021. We are confident that demand for our products will remain strong in the coming year. Our shipments have been particularly strong over the last few months and we are now up to speed with our production schedule vis-à-vis new supply and logistic arrangement. As before, we are developing products to cater for the stay at home and work from home requirement. We are of the view that the global furniture trade will continue its growth in 2021 as we adapt to the new normal and global economy activities return to normalcy."

Comments:

1. Higher revenue and profit margin achieved in Q4 FY20 mainly due to higher sales orders from US customers and lower raw material cost which is aligned with prospects reported by the management in previous quarter. This shows that the management is quite transparent to shareholders. 

2. Strong demand is expected to sustain as per management comment, shipment has scheduled until Jun/July 2021. 

3. The management has also speed up their production, which is good that we would expect a continuous low operation cost for coming quarters. 

4. Expecting 10% rise in furniture sales for 2021, the sales orders for Pohuat might see a slightly improvement next year. This quarter Q4 FY20, Vietnam operation has recorded the historical high revenue yet Malaysia operation seems decreasing, I would like to see what strategy Pohuat management would take to grab extra orders, should the management focus to expand Vietnam operation or fine tune Malaysia operation to increase production. 

5. Production and sales are generally lower in Q1 & Q2 due to the local festive period as well as the summer holiday. The coming quarter result might not be higher than Q4. 

6. Overall FY20 performance is better than my expectation. EPS was 28% higher than my prediction. By taking the FY20 EPS of 22.14sen

PE = 10

Target price = RM2.21, potential 24% upside form current price of RM1.78.

7. I reckon that the coming Q1 FY21 revenue would continue to sustain higher return and Malaysia operation would able to pick up, expecting Malaysia operation to achieve RM104mil and Vietnam to achieve RM108mil. The expected EPS for Q1 FY21 would be 6.21sen a 32% lower compared to Q4 FY20 by considering normalizing sales demand after year end festive seasons.

EPS = 6.21sen + 9.2sen + 4.88sen + 2.93sen = 23.22sen

PE =10

Target price = RM2.32, potential 30% upside from current price of RM1.78.

8. Net book value of RM1.82, which current price is still undervalued. 

9. The improvement in assets and now Pohuat is having 76sen of net cash per share. 

10. Higher dividend payout this year, although lower revenue achieved due to MCO interruption. A total of 9sen dividend payout for FY20 which is  5% DY on current price of RM1.78.

Key risks:

1. Normalize raw material costs and shipment costs will reduce future profit margin even though higher revenue could be achieved. 

2. RM strengthen against USD. Earlier of Nov 2020, RM/USD price has broken out the major bearish trend. RM/USD continues to trend up and we would expect higher forex loss in coming Q1 FY21. 

Technical Analysis

 

VS Q4 FY20 Review and Look Forward Q1 FY21

 

The Q4 FY20 revenue of RM882.6mil was 15% lower compared to preceding year corresponding quarter.  PBT meanwhile grew 45.7% to RM71.3mil. The improved earnings for the current quarter despite decrease in revenue was mainly attributable to much smaller losses from the operations in China following restructuring and streamlining of operations by adopting an asset-light and lower-cost model.

For the financial year ended 31 July 2020, the Group recorded a revenue of RM3,243.2 million, a decrease of RM735.2 million or 18.5% as compared to RM3,978.4 million recorded in the preceding year. Profit before tax stood at RM151.6 million, having dropped by RM30.3 million or 16.7% over the same period.

The reduced earnings for the cumulative quarters was mainly due to losses of RM26.9 million incurred during the temporary closure of factories following the Movement Control Order (“MCO”) that was imposed in the preceding quarter, in addition to lower orders from a key customer.

Malaysia segment Q4 FY20 result had surpassed my estimation as mentioned in previous post. PBT was RM93mil compared to my prediction of RM55mil. However, Indonesia and China Segments were having losses serious than I thought. Although Indonesia expected to record 2nd write off of RM2.6mil, the net loss after excluding the write off was actually worsen. No statement was made by the management on the increase in the loss for China segment. 

A summary compilation of research houses' analysis reports from VSI's briefing:

The floor care products has reaching the end-of product life cycle and we might see lower order flow from UK customer (Customer X). But the short fall orders can be covered by the newly secured motorized printed circuit board assembly (PCBA) and box-build jobs, in Aug 2020, which contributing RM200mil to FY21's top line. Production is set to begin in Dec 2020. Key customer X had contributed about 40% to VSI's FY20 revenue. 

VSI currently produces three models for US-based customer (Customer B), with two more slated for production by Dec 2020 and early 2021 respectively. On top of that, four additional models were secured and will begin  production by 2HFY21 bringing a total of 9 models confirmed for this customer. Due to the better orders flow, VSI had allocated a further 180k sqft to cater for customer needs, on top of the current 160k sqft. The Aminvestment mentioned the group may potentially secure up to a total of 12-13 models. 

Expecting higher sales orders in FY21 from coffee brewer and pool cleaning customer due to increase in demand post-lifting of Covid 19 and at-home consumption and some order diversions from China. Coffee brewer contributed 22% to VSI's FY20 revenue. While VSI achieved a record revenue of an estimated RM200mil from pool cleaning customer in FY20. FY21 revenue contribution from pool cleaning customer is targeted to increase by 50% YoY on higher orders in the pipeline. Among VS customers, pool cleaning customer dominates the highest margin of all. 

VSI recently secured the new US-based customer; Victory in Aug 2020. Currently the group is in the midst of completing the mold fabrication and tooling and targets to commence production of its two spray models by Q1FY21. 

Comments:

- We can only focus on Malaysia segment businesses as the board is actively looking to expand its current production capacity to cater for future orders from the US-based customer (Customer B) and future prospective clients. I don't expect any profit could be achieved from Indonesia and China segments in FY21.

- Expecting Q1FY21 revenue to increase compared to Q4 FY20 primarily contributes from Victory and US-based customer (Customer B) that cushion the slow down from UK customer orders. 

-  Q1 usually is the peak season for VSI. Hence,  with all those prospective orders mentioned in analysis reports, I am positive on the coming PBT to record RM85mil an increase of 20% from Q4 FY20 and reckon a EPS of 3.09sen for Q1FY21 with a 10% discount rate. 

- By anticipating 5%  profit margin gain from Malaysia segment in Q1 FY21 as compared to Q4 FY20, Indonesia segment will remain lower loss around RM3.9mil with the absent of impairment loss and China segment to be remained slightly higher loss on RM8.6mil in Q1 FY21. 

- Current PE of 42 at RM2.60 (13/12/20) is way higher than my expectation in earlier post. It turns out PE 42 is still around the average value, as the recent EMS player stock prices have been quite bullish. 

- I reckon that FPE will further reduce to 38.8 with the accumulate EPS of 6.70sen (3.09sen[F]+2.87sen-1.05sen+1.79sen)

- Target Price = RM2.68 with PE= 40.

Technical Analysis

Upcoming earning result is just around the corner, the bullish trend starts to lose its momentum. 

MACD is about to make negative crossing and its moving trend is showing a divergence pattern with price trend, which is not a good sign to trade. 

The next support line is around RM2.50 for the chart to retest the breakout point. If the price cannot rebound on this price but moves below the support line I would take profit on my holding with a potential of additional 3.2% drop. While the price rebounds, a good profit of 11% to the next resistance point at RM2.79 which it is worth to top up at this point for short term trading.

Overall, the price is already ahead of the fundamental. Unless VS can provide more positive news to stimulate the uptrend momentum such as getting new prospective clients with higher margin or bonus issues. It might not be a good price to hold for long term as of now. 

FPI Q3 FY20 Review

Q3 financial rebounded with superb performance!

FPI reported a higher revenue of RM281mil, an increase of 7.8% from the previous corresponding period last financial year. Thanks to higher sales volume recorded which was aligned with the comments from the board during AGM. 

The group mentioned that the higher sales volume has resulted in higher earnings before interest, tax, depreciation and amortization (EBITA) of RM36.8mil for the current quarter compared to RM24mil in the previous year's corresponding quarter. 

The management has done a better cost control under Q3 to reduce the distribution costs, administrative expenses and other expenses. 

Gross margin has achieved a greater improvement from 11% in previous corresponding period last year to 15%.  

Referring to the latest balance sheet, total assets and liabilities have increased compared to last financial year. The increase was primarily contributed from higher trades, other receivables and other payables which showing us FPI is making more sales transactions. It would possible to carry forward to next quarters and realize in sales revenue.

Cash flows from operating activities has turned into positive in Q3 FY20 compared to previous two quarters were recorded with negative cash flow and it recorded a higher net cash compared to last year. 

Hence, I expect management will pay higher dividend for FY20. 
 

Financial year-to-date ended 30 September 2020 

For the 9-month period ended 30 September 2020, the Group recorded 13.1% lower sales at RM513.2 million compared to RM590.9 million in the previous year’s corresponding period as the Group shut down its operations from 18 March 2020 in compliance with the Movement Control Order (“MCO”) imposed by the Government of Malaysia in an effort to contain the outbreak of COVID-19 pandemic. The Group resumed its operations at end of April 2020. Nevertheless, the Group recorded higher EBITDA of RM60.0 million for the 9- month period ended 30 September 2020 compared to RM51.6 million in the previous year’s corresponding period mainly due to change in sales mix. 

The Group recorded significantly higher sales of RM281.0 million or an increase of 161.2% in the current quarter compared to RM107.6 million in the immediate preceding quarter mainly due to higher sales volume. As such, coupled with better economies of scale, this has resulted in higher EBITDA of RM36.8 million as compared RM13.9 million in the immediate preceding quarter. 

Comments:

- The management has made its promises during AGM that sales order will return during Q3 as normally FPI has its peak season during this quarter with slightly lower profit margin due to 3 new products introduced. Moreover, under this pandemic situation, such financial performance is beyond my expectation as I only anticipated that FPI might able to sustain the profit margin similar to last year. Well, this is a good management and be very cautious with their business.

- Operating costs did come down, as management did explained that implementing automation and machinery to their new products. 

- In earlier post, I reckon that FY20 EPS to be 14.7sen. Q3 FY20 performance has already exceeded my prediction. Hence, I would expect a higher EPS to be achieved in FY20 at 18.58sen. 

FY20 EPS = 2.2sen + 1.98sen + 10.4sen + 4.0sen (Forecast) 

By taking PE = 12, Target price = RM2.23

Assuming that 65% dividend payout rate, FY20 I am looking at a 12sen DPS.

After dividend adjustment, expected TP = RM2.11. with 6.5% DY at current price of RM1.85 (19/11/2020)

Technical Analysis    

Currently stock price is moving in a bullish trend, as hot money has returned to this stock. Next support line would be RM2.04 and resistance line at RM1.78. 

By comparing the uptrend of stock price since last quarter until now was just about 35%, but profit has increased 205% from RM8.5mil in Q2 FY20 to RM25.8mil in Q3 FY20. The uptrend is yet to consider overpriced as compared to the trending from glove sectors. Hence, I believe the stock price will able to meet the 2.618 fibo line at RM2.04. 

Homeritz Q4 FY20 Review

Homeritz recorded a higher revenue and profit despite covid-19 and global political uncertainties!

It was a commendable quarter result. Homeritz recorded its revenue and PBT for Q4 FY20 with an increase by 37.8% and 73.3% respectively compared with the corresponding period last financial year. This was primarily contributed to the increase in volume sold, lower material cost and forex gain.  

The management has made a great improvement for its FY20 performance despite the unprecedented operation interruption imposed by government during the financial period. The group recorded an increase on its revenue and PBT by 5.2% and 10.2% respectively compared with the corresponding period last financial year. 

The management reported that due to the operation interruption (MCO) happened in Q3 FY20, the group's revenue and PBT for Q4 FY20 increased by 90.3% and 203% respectively compared with the Q3 FY20.

Balance Sheet Comparison Q3 FY20 & Q4 FY20

Homeritz is a net cash company with a net cash per share of 25.72sen. Translating into the current share price, 30% of the current share value (RM0.855 as of 28/10/2020 closing price) is the company's net cash.

Also, we see the management has stocked up inventories from RM 26.9mil (Q3 FY20) to RM32.8 mil (Q4 FY20). Trade and other payables have also gone up to RM 19.3 mil from RM10.7mil. We can predict that the group has more sales orders coming in next quarter, Q1 FY21. 

Lower Raw Material Cost- The Key Factor

Public Invest reported that leather is one of the main raw materials sourced by Homeritz as it accounted for about 50% of total raw material cost. Recently, the price of its raw leather from India have been trending downward, resulting in margin expansion since FY19. 

RM/USD Continues to Remain Bearish! 

The group's earnings are mainly derived from exports and sales are mostly transacted in USD. I anticipated that the profit from forex gain would continue as the current political upheaval in Malaysia, it might further weaken the RM/USD. As those raw materials like leather and fabric which mostly imported can also provide a natural hedge against currency fluctuation. 

Technical Analysis 

The shock price has rallied around 140% from the lowest point during the MCO was imposed. I am a conservative trader, I didn't buy at the fall nor rebound until the trend has shown a strong buying signal, I entered. That was on 11th Aug 2020, where price had broken up EMA 200 and stayed above for three trading days; the famous bullish signal trend. 

The price has continuously making higher high and higher low points and the next resistance point would be around RM0.983 and the support line is at RM0.825. 

Comments:

- Q4 FY20 was slightly below my expectation as in my previous review on Homeritz, I reckoned that EPS to be 2.66sen. But the stock price has exceeded my target price.

- As I shown earlier, higher stocking up in inventories and also many countries are still in "work from home" status which can further stimulate the interest in home furniture. Hence, I believe the coming quarter can still generate high profit margin.

- Based on Homeritz's track record, Q1 and Q4 usually will have higher revenue and profit. I anticipate that the coming Q1 FY21 can achieve 2.6sen of EPS supported by the continue weakening in RM/USD and raw material cost remains low.  

- TP of RM0.928. 

By taking FPE of 12, Forecast Q1 FY21 to be 2.6sen. Remaining Q2 = 1.93sen, Q3 = 0.82sen and Q4 =2.39sen. 

Forecast EPS/year = 7.74sen

Target price = 12 x (7.74/100) = RM 0.928  

- The bullish trend is able to sustain as the recent corporate announcement of bonus issue and free warrant will attract and retain shareholders. 

- Lastly, a 1.5sen final dividend was proposed by the management that bring the DY down to 1.75%. In such an unprecedented business interruption condition, even blue chip companies have announced to delay the dividend payout. At least Homeritz can still pay dividend! 

Overall, I still maintain my bullish view on Homeritz. 

The Yellow Man - DIGI

Who is DIGI 

Digi.Com Berhad is one of the big 4 telco company in Malaysia. According to Source: Statista 2020, Digi has 18% of telecommunication market share in Malaysia.

Up to date, Digi has 10.68mil active subscribers and its 4G LTE and LTE-A network coverage have grew to 91% and 74% of the population nationwide respectively, also with the recent launched fibre to the home (FTTH) solution, Digi has 9,850km of extensive fibre network to serve 3.7 million households. 

Take a glance on Digi's financial performance indicators:

1. Digi has up to 99% dividend payout ratio, highest dividend yield among the telco companies.WOW!!

2. ROE of 206%!! Insane!!

3. EBITDA margin around 50% and market cap is standing at Rm30.945bil. 

The financial performance was so nice that I believe it attracts many dividend stock hunters including me.   

The company structure is quite simple. 

49% of Digi's share owns by its mother company, Telenor group and Digi's top management is also controlled by Telenor staff. Top 30 largest shareholders are mostly foreign and local funds which holding 86.49% of total issued shares, very high entry level for retails to play!

Yup, Digi is not a local company and I am not supporting buatan malaysia so far😆

Hmm...Everything looks so good. Is it good to invest in Digi? Let's dig into the latest quarter report that released recently. 

 

Digi reported a slight growth in revenue of 1.1% in current financial quarter as compared to previous corresponding financial quarter. However, PAT was down by 9.8%. Year to date, revenue was however trimmed by 0.6% to RM 4.59bil compared with the corresponding period last financial year of RM 4.62bil. PAT was also declined 13.7% Y-Y. 

                                     

Under Q3 FY20, Digi reported higher mobile service revenue of RM1.374 bil, up by 4% compared to preceding quarter primarily contributed by the prepaid segment to offset softening postpaid revenue as postpaid market was challenged by involuntary churns and plan downgrades due to softer affordability. Postpaid ARPU trimmed marginally to RM67 on the back of lower roaming contributions on closed international borders and overall weaker consumer spending due to Covid-19 effected interconnect ARPU. 

The prepaid subscriber base improved for the first time since 3Q 2019, thanks to the efforts by the management to grow its Malaysian base to offset the shrinking migrant business and their latest prepaid packages have meet consumer sentiments. Prepaid ARPU uplifted by RM4 Q-Q to RM33 alongside prepaid subscriber base expansion of 67k amidst heightened data competition. Digi recent product launches namely Digi Abadi and Digi Prepaid NEXT enabled price-conscious consumers to access to high speed internet connectivity via bite-size data passes. 

Total subscriber base improved by 57k users to 10.7 million whilst blended ARPU escalated RM2 to RM42, underpinned by the prepaid resilience and innovative postpaid offerings that drove quality and loyal subscribers. Device and other revenues chalked up 51.9% QQ and 37.6% Y-Y on encouraging take-ups for renewed PF365 plans built in with greater savings and flexibility.

 

Digi is also launching FTTH service since Q4 FY19. However, there is no significant revenue recorded in the quarter report. 

EBITDA margin slips to 50% compared to 53% in 3Q19 and 2Q20 respectively and 3QFY20 net profit fell by about 10% Y-Y due to higher device sales and the normalization of marketing cost. Meanwhile, opex increased by 3.9% Y-Y as the previous year included a non-recurring cost of RM17mil. Depreciation cost rose 6.8% Y-Y as Digi continues to invest in network expansion. Also an additional RM12mil provision for doubtful debt was recognized due to the group's commitment to manage bad debt risks in the current challenging economic environment. 

Balance sheet summary

Total Assets as at 30 September 2020 contracted to RM8.04 billion on utilization of internally generated

funds for loan repayments. As a result, total borrowings trimmed to RM2.77 billion, of which 78.1% comprised of Islamic borrowings. Hence, total liabilities was reduced to RM7.39 billion. 

A more detail summary was shown in the table, where cash & cash equivalents reduced from RM519 mil in previous quarter to RM365 mil contracting by 42.2%. Total equity was improved to RM644 mil but was lower compared to preceding year corresponding quarter. 

Comments:

1. Personally I feel that Digi focuses on the low-end market as ARPU for postpaid and prepaid are lower compared to Maxis. But Digi manages to generate higher profit margin in such competitive market. Apparently, Digi is very focusing in cost optimization to maximize the return to shareholders especially its mother company. Hence, investing in Digi can enjoy the same profit as Telenor group.  

In other word, Maxis has more room of improvement to expand its market share into the low-end market. 

2. Would it be too late for Digi to join in fibre network market? Digi has partnered with Time DotCom to provide fibre footprint to more locations and can connect more malaysians residing in high-rise residential areas. With the same packages offering among three players, would Digi be a little too pricy? It might be the reason where no significant revenue was recorded since the package was launched back in Q4 FY19. 

3. Continue shrinking in revenue, net profit as well as dividend payout has shied away traders. Telco industry is now facing a shift from voice & SMS to internet usage and from prepaid to postpaid that caused revenue to drop. 

Looking at one year price trend, most of the telco stock prices are in negative return. Maxis and Digi were slightly above the telecommunications & media index. We can also spot that solid line connection (Fibre network) business provides more upside in stock price. Hence, it is clear that the fibre network business has more future capacity expansion compared to data internet business which has been quite saturated. 

As a consumer, I have to agree that solid line can provide a more stable internet connection with unlimited and faster streaming speed compared to internet data plan provided by telco companies. As smart phone getting more important in our daily life, a more stable connection and faster streaming speed is essential. Hence, I can see Digi emphasizes on the network expansion work in order to enhance its network quality, widen its fibre footprint and also recently Digi announced a collaboration with ZTE Corporation for its nationwide Radio Access Network modernisation..and bla..bla..bla..In short, Digi spend more money to upgrade network facilities. 

4. I anticipate that the Q4FY20 revenue will slowly pick up as the some additional sales will contribute from Phone Freedom 365 program as usually Q4 will have new handsets launching. 

Technical Analysis

Price is moving in a major downtrend, lower low and lower high. Next support line is RM3.95, if the price breaks below, the next support line would be RM3.82.

At the moment, I still can't see any slow down on the downtrend. Although Digi provides good dividend payout but overall it is a loss making investment. I will continue to observe the financial performance to look for the entering point when business start to recover. 

Conclusion

I expect higher sales from phone freedom program and higher prepaid subscription from the coming Q4FY20. Hence, I reckon that the EPS could be achieved at 4.2sen. As such a full year dividend would be around 16sen.   

By taking PE at 25, TP should be RM4.08 and dividend yield of 3.92%. 

Overall, it is not attractive to invest.

Pohuat Q3 FY20 Review

 Would furniture stocks be the next "glove" trend?

Overall Q3 FY20 financial performance was commendable despite this quarter was having some impact from MCO. Pohuat recorded a lower revenue of RM132.8 mil under Q3 FY20 compared to RM 164.8mil in the previous corresponding quarter last year. The decrease in revenue was mainly affected by reduced production levels and lower demand from customers amidst the covid-19 pandemic. However, profit was recorded marginally higher compared to the corresponding quarter last year by 2%. Let's see how did Pohuat make it.

A summary of revenue recorded for both regions in Malaysia and Vietnam from Q1 FY29 until the recent. Undoubtedly, the revenue from both regions were badly affected by the reduce in sales orders during the pandemic breakout period and operation activities were suspended in Malaysia from 18 March to 4 May. But we can see that the revenue trend has slowly recovered. 

The group reported that the operation in Malaysia resumed on 4 may 2020 following the relaxation of the mandatory movement control order announced by the Malaysian government. Shipment was lower in May 2020 as Pohuat managed supply and logistics restriction following the first phase of the movement control in Malaysia. During the month of May, the group focused on fulfilling orders which were previously placed or rescheduled by buyers. Operations however improved in the subsequent months of June and July 2020 as production has ramped up for orders that are confirmed by customers.

In Vietnam, Pohuat also registered lower level of shipment as their production and shipping schedules had to readjusted to in line with customers’ requirements and shipping schedules. Orders and shipments from Vietnam were reported higher in the months of June and July 2020 as US importers and retailers adjust their inventory restocking levels in line with indications of recovery of demand in the US.

Although Pohuat recorded a lower revenue, pretax profit margin for Malaysia region was higher than previous corresponding last year. The management explained that the higher gross profit margin was due to lower costs and more efficient use of raw materials. Selling expenses as a percentage of sales were slightly lower during the reporting period due to lower level of shipment while fixed administrative expenses as a percentage of sales inched up due to the lower turnover during the current reporting period. In short, lower material cost, less subcontracted parts were use and reduced on overtime cost. 

For Vietnam region, the gross profit rose slightly due to the efforts in controlling manufacturing costs despite the lower labour efficiency from rehiring of production workers. 

Prospect highlight from the management:

- US economy experienced the sharpest declines in decades, US GDP falling by 16% under second quarter of 2020

- US furniture importers rescheduled shipments and held back orders in the second quarter of 2020 due to the unprecedented movement restrictions being imposed on most states

- Furniture retailers in the US reported booming business in June and July 2020 from pent up demand following two months of near complete shutdown in retail activities and a spike in demand for home furniture as more and more American stay and work from home

- The U.S. Department of Commerce reported that the furniture and home furnishings store sales increased 33% monthon-month in June 2020 while the retail sales increased to USD524 billion, nearly back to pre-pandemic levels.

- The management announced that the group have received encouraging order over the last 2 months and now have better visibility on order shipments until February 2021.

Comments:

1. Q3 performance was commendable and the malaysia profit margin was surprised me. In fact, with the lock down imposed during Q2 period, it shows that there are rooms of improvement for the production processes such as:

- to automate the production machines to cut down relying on man power/foreign workers and reduce the overtime cost 

- to fabricate or produce those subcontracted parts to further reduce down the material cost

2. Pohuat benefits from low material cost and strong orders for the coming 2 quarters, revenue and profit will likely to recover back to pre-pandemic level. 

3. I believe Q4 FY20 performance will be the best throughout the year. I reckon that Malaysia region PBT could achieve RM14mil due to the seasonal sales cycle and other factors such as lower material cost and stronger USD/RM, while Vietnam PBT likely to improve to around RM9mil, similar to Q4 FY19. The Q4 FY20 EPS to be 7.14sen with a 80% discount factor. 

FY20 EPS = 19.64sen 

Forecast PE =10

Target Price = RM1.96 (42% potential upside with current share price at RM1.38)

4. Pohuat is having 50 sen net cash per share by now. It is still financially strong to pay dividend amidst other companies have postponed the dividend payout. 

5. As per my last blog mentioned, I have reduced my holding in Pohuat early of the year due to the lower sales season and unclear effort from the management to lower down the operating cost, I would monitor back Pohuat as it is still undervalued with P/B ratio of 0.83.

Technical Analysis

Pohuat price is in a bullish trend. Support line at 1.37 & Resistance line at 1.56. It is still safe to buy around 1.40 with a good risk and reward ratio. 

Conclusion:

Anyway I don't anticipate furniture stocks can be trending like glove stocks as the sales orders are just recovered to pre-covid level.