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
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.
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