Pavreit Q4 2019 Review

Q4 2019, Pavilion REIT recorded a total gross revenue of RM145.962 mil, a contraction of RM1.0 mil or 1% as compared to Q4 2018. The decrease was explained by management in the report due to lower occupancy and rental rate at DA MEN mall. In fact, I find this explanation is not really correct. I will explain my observation later. 

Q4 and FY19 PBT contracted due to higher property operating expenses and lower valuation of investment properties. The improve in FY19 revenue mainly thanks to the newly acquisition of new shopping mall- Elite Pavilion Mall. 

When I look into revenue breakdown for respective retail and office properties, Q4 report shown that, only pavilion kuala lumpur mall was improving, it increased by 1% compared to preceding year Q4, Intermark Mall, Da Men Mall, Elite Pavilion Mall and Pavilion Tower were reduced by 8%, 12%, 3% and 4% respectively. 

Total revenue for FY19 was 5% higher compared to preceding financial year. This was mainly contributed by newly acquisition of Elite Pavilion Mall at the end of April 2018, higher revenue rent and electricity income from Pavilion K.L. Mall for supplying electricity to Pavilion Hotel and Pavilion Suites. However, the gain was partially offset by lower rental income from Intermark Mall, Da Men Mall and Pavilion Tower. 

From the summary in table above, Intermark Mall, Da Men Mall and Pavilion Tower rental income were decreased by 8%, 21% and 6% compared to preceding financial year. 

Total property operating expenses was higher by RM8.6 million or 19% compared to Q4 2018. This was mainly due to the costs incurred for tenancy lots enhancement at Pavilion Kuala Lumpur Mall and DA MEN Mall, preventive maintenance of lift doors as well as upgrading of some common areas in Pavilion Tower, marketing expenses incurred for Deepavali and Christmas events, upgrading of advertising media as well as writing off of non-recoverable debts. 

Fair value gain of RM15.0 million arising from the valuation of investment properties as at 31 December 2019 was recognised in the current quarter, mainly contributed by Pavilion Kuala Lumpur Mall. The fair value gain for 2018 recognised in Q4 2018 was RM33.6 million.

Tenancy Status for each property:

Pavilion K.L Mall

Intermark Mall

Da Men Mall

Elite Pavilion Mall

Observation:

1. Pavilion KL Mall, Q4 FY 19 has lower occupancy rate compared to preceding year corresponding quarter but revenue increased. 

2. However, Intermark Mall was having lower revenue although higher occupancy rate was achieved. 

3. Da Men Mall occupancy rate reduces even management had improved retail facilities

4. Elite Pavilion Mall is facing lower occupancy rate compared to previous year. 

Comment:

Downside Risk

Da Men Mall is the most under-performed retail. I would said this is a wrong investment plan made by the management, as they fail to implement those success strategies from Pavilion KL Mall onto Da Men Mall. 3 years CAGR of Da Men Mall is -16%. Moreover Da Men Mall property value for FY19 was reduced by 29% compared to preceding year. Over these years, no clear business strategy was mentioned by the management, they were just mainly focusing on upgrading existing facilities. 

The management's business direction is to expand its asset profile through acquisition opportunities rather than reviewing their marketing plan. A wrong investment, it will be another retail like Da Men Mall keeping under its asset. Pavreit management is too relied on their properties geographical advantages in running their business. I feel that the management should be more aggressive to attract more shoppers and retain them, in order to increase and retain their tenants as well.

I would give a sell call for Pavreit as the result was not growing even though a new shopping mall has been acquired and most of their retails are in city center. By taking the retail sales growth rate of 4.6% for 2020 estimated by Retail Group Malaysia, I forecast FY20 EPS would be remained lackluster.  

Pohuat Q4 2019 Review

Q4 Result is below expectation!

Previous post on Pohuat, I forecast the FY19 cumulative EPS would be 23.89sen, but Pohuat has just closed its financial with 22.91sen EPS!!

Let's us dig into its financial report to figure out what has caused pohuat's performance to slow down.

Quarterly, revenue grew a marginal 1.4% to RM192.08 mil from RM189.51 mil last year. Net profit was lower by 28.9% to RM14.83 mil from RM21.13 mil a year ago mainly due to lower contribution from both malaysian and vietnamese operations as well as losses in other income. 

 

Pohuat recorded a marginally higher turnover of  RM192.08 million compared to RM189.51 million recorded in the previous year corresponding quarter ended 31 October 2018.

Malaysia operations continue to do well due to sustained orders for its panel-based bedroom sets for the US market. Furniture distributors and retailers in the US are ordering more panel-based bedroom furniture to cater for the younger generation of urban dwellers who are more budget conscious and comfortable with ready-to-assemble home furniture. Shipment of traditional office furniture to our traditional markets remained strong. 

Shipment of furniture from Vietnam operations remained stable, particularly for the affordable range of spray-painted bedroom sets in line with our customers’ focus on the broader segment of the US furniture market.

Year-on-year, the Group recorded higher USD sales of USD167 million compared to USD151 million in the previous year. The bulk of the increase was attributable to the higher shipment of panel-based bedroom sets from Malaysia. Contribution from this segment had increased to 34% of total Malaysia sales from 26% a year ago. Their production lines are running smoothly throughout the year.

From revenue perspective, Pohuat businesses are actually growing. Sales order has increased by 10.6% this year compared to FY18 amid the slow down in global economic. 

Despite higher sales, lower profit before tax was recorded with RM19.90 million in the current reporting period compared to RM26.37 million in the previous corresponding reporting period ended 31 October 2018. PBT has contracted by 24.5%! This is awful!

In Malaysia, gross profit was marginally higher at RM19.03 million compared to RM18.96 million in the previous corresponding reporting period ended 31 October 2018. Profit before tax was however lower at RM11.67 million due to higher distribution and selling costs as well as a much lower forex gains of RM0.09 million recognised during the period under review against a significantly higher forex gains of RM1.03 million in the previous corresponding reporting period ended 31 October 2018.

In Vietnam, gross profit was lower marginally at RM16.09 million as compared to RM17.25 million previously due mainly to the higher depreciation charges against a lower raw material cost. In line with lower gross profit, profit before tax was lower at RM9.43million compared to RM11.60 million in the previous corresponding reporting period ended 31 October 2018. The lower profit before tax was mainly due to the increase in marketing expenses of about RM1.03 million and the increase in administrative expenses of RM0.84 million.

During the 4th quarter, Pohuat on 30 Aug 2019 has de-registered and ceased its operation in South Africa which has been in dormant since the last financial year ended 31 October 2018. Pohuat has 51% ownership in Poh Huat International Furniture S.A (Proprietary) Limited.

The de-registration and the ceasing of the Company’s 51% owned Poh Huat International Furniture S.A (Proprietary) Limited mentioned in Note A10 above, has resulted an one-off realisation of forex translation loss of RM0.92 million in net other income during the current financial year.

YoY Review

For the year ended 31 October 2019, the group recorded 20.25% increase in gross profit, from RM102.11 million in the previous financial year to RM122.78 million in the current financial year. Gross margin rose from 16.42% to 17.52% during the same period. The improvement in gross margin is attributable mainly to the lower raw material costs and overall reduction in factory overheads as a percentage of sale due to the better plant utilisation rate for the current financial year.

During the current financial year, Pohuat recorded a significantly lower net other income of RM1.41 million compared to RM8.52 million in the previous financial year. The higher other income in the previous financial year comprised mainly the recovery of RM4.50 million previously impaired for the disposal of our former subsidiary, Poh Huat Furniture Industries (Qingdao) Co Ltd in 2011 and insurance compensation of RM4.28 million received for the fire at one of the factories in Malaysia. 

QoQ Review

In line with pre-year end seasonal peak, the Group recorded a 15.52% increase in turnover from RM164.85 million recorded in the preceding reporting period to RM192.08 million for the current reporting period under review.

In Malaysia, turnover rose from RM77.43 million in the preceding reporting period to RM89.85 million in the current reporting period. In line with the higher turnover, gross profit increased from RM16.17 million in the preceding reporting period to RM19.03 million due to better absorption of factory overheads for the current reporting period.

In Vietnam, we also recorded significantly higher sales of RM102.23 million in the current reporting period against RM87.42 million in the preceding quarter. Gross profit increased from RM12.20 million in preceding reporting period to RM16.09 million in the current reporting period. Raw material costs as a percentage of sales reduced from 59.44% in the preceding reporting period to 54.92% in the current reporting period. In line with the higher gross profit, profit before tax increased from RM5.95 mil in the preceding reporting period to RM9.43 million in the current reporting period.

Comments:

A weaker 4th quarter reported are mainly due to:

1. lower forex gain. Last year, USD had strengthen against RM by 3%, but only marginal appreciated during the period under review. 

2. Higher distribution and selling cost and higher operating expenses have further squeezed down company's profit. However, the higher operating cost will continue to incur in following quarters. We shall see whether Pohuat's management team is able to reduce the cost in near future.  

3. One off forex loss due to the de-registration of its subsidiary. By excluding the one-off forex loss, the net profit shall stand at RM51.63 mil which giving a cumulative EPS of 23.24sen. Yet, the overall Q4 performance is still below expectation. 

I'm not optimistic that the Q1 FY20 will be performing too and I reckon it's performance will remain discouraging. There are few risks that need to take note. Q1 FY20 will be having forex losses due to recent weakening in USD/RM. Forex losses will cause lower net other income recorded. 

Moreover, revenue might reduce due to holiday period (CNY) in both Malaysia and Vietnam segments. Lower revenue will further affect factory overhead cost and reduce profit margin. Also the latest min wages that will initiate in first quarter 2020 might further threaten Pohuat's profit margin. 

Hence, I will reduce my holding in Pohuat until all risks have been under controlled. Pohuat is currently trading at RM1.52 which is lower than its NTA of 1.63 and 60sen of net cash per share. I believe the share will continue to move in side way. Resistance: 1.52, support: 1.48.