Thursday, 24 December 2020

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


 

Sunday, 13 December 2020

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.