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

 

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. 

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. 

Poh huat Q3 2019 Review

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.