GeorgeKent Q4 FY20 Review

A very expensive lesson that I learnt through my investing journey! By not having a proper investment strategy when I buy in this stock. I bought in George Kent (Gkent) on 27th March 2017 when Gkent was traded at RM3.78/share. During that time, I just followed tips given by a famous stock guru, without researching on the company background and it was one of the best bullish stock in 2017. 

After the change of government happened back in 2018, stock price fell like no tomorrow, just within a day of limit down, my portfolio from profit turned into loss. However, I thought it was a panic sell down on the unstable politics in our country and I topped up on this stock, not believing it will have any impact to Gkent financial status. 

After few quarters of monitoring, Gkent's existing projects were affected and cancelled as what we all know. I looked back the guru for help and most hilarious part was the guru had sold the stock without informing his members. And this is a lesson that I learnt, the biggest mistake i made was relying on someone else to advise me what to do on my own money. At the time of writing, I still holding some amount of this counter and having serious loss that not worth to cut loss anymore. 

Now, let's look into the latest quarter report, Q4 of FY20. 

Revenue reported RM 82.4mil was 28.6% lower compared to preceding year corresponding quarter of RM 115.4mil. No dividend was declared during Q4 compared to 3.5sen of dividend per share proposed by management in Q4 FY19.

The Group's current quarter profit before tax of RM10.36 million (31 January 2019: RM37.58 million) was 72% lower. The lower profit before tax reported was mainly attributed to lower contribution from the Engineering division. Other gains/(losses) mainly arose from unrealised loss on foreign exchange of RM1.94 million (31 January 2019: RM0.68 million) on foreign currencies held.

Revenue for engineering segment of RM52.10 million for Q4 FY20 was 35% lower as compared to RM80.53 million for the corresponding quarter in 2019. Segment profit of RM12.58 million for Q4 FY20 was 69% lower as compared to RM40.30 million for the corresponding quarter in 2019. The lower segment profit was mainly contributed by the lower revenue and gross profit margin in the current quarter.

Revenue for metering of RM30.29 million for Q4 FY20 was 13% lower compared to RM34.86 million for the corresponding quarter in 2019. Segment profit of RM5.88 million for Q4 FY20 was slightly higher as compared to RM5.60 million for the corresponding quarter in 2019. 

The group is having net cash position, after deducting all loans and borrowings, Gkent is still holding RM176mil of net cash. I believe the strong cash holding may offer support to the share price through continuous share buy back and sustaining its business operation.

Shareholder equity was improved slightly about 1.7% compared to preceding year. I believe the share value is still there, RM 0.32/share of net cash value. 

Ongoing project lists and outstanding order book 

Outstanding project lists (Not up to date) from Gkent's official website. 

http://www.georgekent.net/projects-reference/

There are remaining 4 major projects under construction. LRT 3 project construction work is taken care under its JV company 50:50 with MRCB. Therefore, LRT 3 project is not recognized in revenue. Same goes to MRT 2 track works where the work package worth of RM1.01bil was awarded to CCCC and Gkent JV on a 51:49 basis. The remaining projects showing in the group's revenue segment are both hospital construction projects and some variation orders from LRT 2 project. 

Outstanding order book reported by RHB investment.

Q4 Company prospects

Comment:

The coming FY21 will have negative impact on its financial performance due to extension of MCO and slower construction progress and manufacturing due to restriction in work force. From engineering segment, the balance outstanding order book that will reflect in revenue is around RM 245mil mainly contributed from two hospital projects that schedule to complete in FY21, by referring to the info written in RHB investment research report. 

Engineering profit margin has reduced from 38% in FY19 to 26% in FY20. I believe that the profit margin may remain stable at around 20-25% in FY21. The net profit contribution from engineering segment for FY21 would be around RM 56.3mil. 

For metering segment, after the changed on secured project status, the group is now focusing back its core business to expand its metering business and reducing material cost. However, the metering profit margin was affected by fluctuation in foreign currency. In near term, I anticipate that USD will remain strong vs RM and lower demand from other countries due to covid-19 pandemic. Hence, metering segment could see lower net profit for FY21 by 5% to RM20mil. 

The overall forecast net profit for FY21 to be around RM34.9mil after considering 16% higher operating cost during MCO and taxes expenses. Forecast EPS for FY21 should be 6.49sen. 

Taking PE of 8, the Target Price is around RM0.52/share. 

RHB investment gave a sell call on Gkent. I believe in near term, Gkent will remain in bearish trend unless the management is able to secure new projects to increase its order book or having new smart metering orders. Gkent is now standing at RM0.32/share net cash position. 

Krono (0176): Author's Review

Kronologi is Asia’s leading authority in cutting-edge enterprise data management solutions, such as IT Infrastructure Optimization and Data Protection. With an extensive regional presence in countries like Malaysia, Singapore, Thailand, Philippines, Indonesia, India, Taiwan, Hong Kong and China, Kronologi is well-positioned to add value to enterprises in the Asia Pacific region.

Kronologi went IPO on Bursa (Malaysia Stock Exchange) in 2014.

Since then, Kronologi has worked with some of the biggest organisations in Asia, including Food Corporation, Toshiba, Ocean Park, NCS and many more.
http://www.kronologi.asia/case-study/

Kronologi’s success stems from helping enterprises unlock the power of relevant technologies for smart cities, data centers, geospatial, autonomous vehicle, backup, archive and cloud providers. As technological requirements differ according to specific business objectives, Kronologi provides innovative “as-a-Service” and customizable solutions – on-premise, cloud-based and hybrid. Through this unique and effective approach, partners are able to unlock the business value of their digital content, ensure data integrity, and keep their work processes safe and smart.

The Group specializes in data assurance and protection to ensure business continuity for clients. Krono's portfolio of products and services provide our clients with the ability to achieve data assurance and protection through the systematic backup, storage and recovery of enterprise data to ensure business continuity as follows:-

i) On-site data backup and storage;

ii) Off-site backup and storage for long term archival;

iii) Data recovery and restoration;

iv) Problem escalation and resolution in the event of issues or errors during the backup process;

v) 365 days, 24 hours a day, 7 days a week technical support; and

vi) Consultancy on process improvement for data assurance, data protection and disaster recovery.

The above-mentioned are delivered via the Group EDM Infrastructure Technology and EDM Managed Services division. 

Krono's Corporate Structure

Group financial Status

Future prospects from FY2018 Annual Report

Although the EDM IT environment is expected to be challenging industry wide (e.g. mismatch of skilled human resources for data management at a time when enterprise data is growing exponentially), we are confident of continuing to provide better products and solutions to differentiate ourselves and provide innovative, value adding solutions to our customers.

The Group foresees that the EDM MS segment will remain highly competitive, but opportunities such as increased demand for hybrid cloud storage and other data management applications are well suited for its range of managed services solutions. To capture this growing market, the Group has already deployed its strategies into Hong Kong and plans to expand into other countries in the coming years.

The Group also expects the completion of its acquisition of Sandz Group in the financial year 2019 to contribute positively to our results. Synergies achieved from the enlarged Group will strengthen the offering of both EDM IT and EDM MS via the experience and network of Sandz Group in the Philippines.

The Group will continue to drive growth both organically through its existing footprint and inorganically via merger and acquisition opportunities, with the objective of expanding our suite of products and services to our existing customers base and in attracting new customers to the Group.

Coming back to the latest Q4 FY2019 Review.

The group's revenue for FY19 has recorded a 44% growth from RM 163 mil to RM 235.5 mil compared to the preceding year of corresponding period. Thanks to the contribution from the newly acquired Sandz Solutions (Singapore)Pte Ltd company.

From the beginning of year when Krono listed in Bursa until now, the CAGR over 6 years for revenue and net profit are 43.9% and 36.7% respectively, proving that data management and IT businesses are growing aggressively. This growth can further be sustained with the increase awareness of data analysis and network security in businesses. Based on this figure, it is a good sector that worth to invest for medium to long term.

If we look further into Krono business performance. Krono is mainly focusing on Asia countries.

The group continues to drive its growth can be seen from their recent activities that Krono acquired Quantum Storage (HK) Limited back in Dec 2017 which contributed to their sales from Hong Kong and Taiwan. The following years, Krono expanded its market share into more countries via acquisition of Sandz group on April 2019. Through Sandz group's network, Krono has ventured into Philippines and China market.

The breakdown of revenue by geographical area for each quarter from FY2018 to FY2019 can clearly see that Singapore market is Krono existing client base. However, sales from Singapore has slowed down. I anticipate that IT (Infrastructure Technology) businesses in Singapore has already saturated. In order to maintain their revenue, therefore, the managements try to grow their businesses inorganically via merger and acquisition opportunities. In FY2019, Krono has businesses in Philippines and China.

Hence, I can see that the management already have a good business strategies to drive their businesses. Although IT businesses will slowly get saturated in other countries, Krono has another business which is data management services for their new and existing customers as second income generation and also future plan. IT segment is still the main contribution to the group's revenue. One thing worth to take note is their data management services has improved the contribution compared to preceding period which it was only consisting of 6% in revenue for FY18 but 8% in FY19.

As mentioned earlier, contribution from China and Philippines market has increased the revenue starting from Q3 FY2019 mainly due to the sales revenue from Sandz group.

By looking at the gross margin trend, business expansion activities have caused higher operating cost which further reduces their gross and profit margin. Although Krono is still having double digit margin, the management have to optimize their costs to survive in this competitive market.

Comment:

Krono still have room to improve. With the recent Covid-19 pandemic outbreak, many countries are having movement restriction control. I believe it will stimulate more companies to invest in IT and data storage to bring their businesses into the internet.

However, the MCO will also affect Krono's operation in many countries. In latest quarter report (Q4 FY19) the group has highlighted that:
"The Company is cautiously optimistic for the outlook of the year ahead, which is clouded in the near-term by the on-going USChina trade war, political uncertainty in Hong Kong and the more recent global pandemic resulting from the Covid-19 virus. However, our evolving business strategy remains on track for achieving further business growth in the medium-to-long term."

Contributions from infrastructure technology segment might reduce due to their IT staffs are not able to carry out projects on site during MCO. Therefore, I reckon that the EPS for Q1 FY20 will reduce to 0.33 sen with a 50% reduction from preceding quarter. The reason I took Q4 FY19 EPS as a reference because after the newly acquisition, operating costs have increased which causes thinner margin compared to Q1 FY19.

By taking PE as 14, future EPS will be around 2.77sen to 4.56 sen, target price for Krono is around RM 0.40 - RM 0.56.

Technical Analysis:

Share price touches the resistance point at RM 0.57. Price closes above EMA50 trend on this Friday. It is a positive sign, where volume continues to improve to support the up trend, positive crossing between short term EMA 10 and 30 trends is about to happen. CCI continues to rise showing a strong buying signal on this counter. But the trend closed with a doji in the last trading day. Hence, next Monday, if the price stays above doji and EMA50, bullish trend remains. 

VS Q2 FY20 Review

Another wave of sell down might be just around the corner!

Current qtr VS has reported a decrease of RM 158.7mil or 16% in revenue as compared to the previous year corresponding qtr. The reason been explained by the group was due to lower sales orders from key customers. 

Align to the contraction in the revenue, PBT was also decreased 11.9% or RM 5.9mil to RM 43.5 mil. The qtr report said the improved earnings for the cumulative qtrs was mainly attributable to much smaller losses from the operations in China which shifting into an asset light and low cost model. 

Inventories, receivables and cash equivalents have slightly reduced during this qtr, same goes to loans, borrowings and payables. Company financial still remain healthy.

Malaysia segment recorded a lower revenue compared to preceding year corresponding quarter mainly due to lower sales orders from key customers which had also affected its PBT. 

Indonesia segment had achieved higher revenue, but PBT reported loss making. The group explained that it was mainly due to less favorable foreign exchange rate. I presume it was due to the continue descending on exchange rate from Rupiah to RM. For the cumulative quarters, Indonesia segment continued to incur loss largely owing to under-utilization of production capacity. In fact, the later explanation has more weight on causing business in loss making. 

Q4 FY19 Indonesia segment was making good PBT which the revenue reported was slightly higher than Q2 FY20 by 7%. However, PBT had drastically dropped by 180%!

China segment recorded lower revenue as a result of lower sale orders completed. Losses narrowed significantly for the cumulative quarters due to lower operating expenses incurred following streamlining activities and adopting an asset-light model with lower gearing structure. 

Company Prospects:

Orders expected to slow in coming months. Management has highlighted that "the operating environment has been challenging amidst the ongoing US-China trade tension and slowdown in global economy. The COVID-19 outbreak since January 2020, which has now turned pandemic, has further put much dampener on both local and global markets affecting trade activities and movement of people worldwide. "

The supply chains to VS from China are expected to delay as suppliers are now resuming operations in mid February 2020. Meanwhile, on the demand side, outlook for the next few months appears uncertain at this juncture. 

Discussion with prospective customers have also been held back, in view of the travel caution and restriction. In addition, VS said the Movement Control Order (MCO) implemented by the Government that is in place from 18 March 2020 to 1 April 2020 (subsequently extended to 14 April 2020), is expected to cause further impact on its operations.

In the prospects, the group has also pointed out that the financial performance of current year is expected to be lower than the previous year. 

Technical Analysis:

I reckon that EPS for FY20 will reduce to around 6.35sen which is around 27% dropping compared to preceding year EPS at 8.75sen. 

- Q3 FY20 financial performance will be the worst ever, VS operation will be badly affected by MCO implemented for 28 days by the time of this writing. Management didn't mention whether can VS operate during the MCO period as it might fall under E&E category and should be able to operate with half force.

- Europe and US major city lockdowns and movement restrictions will have significant negative impacts on customers' sales as normal daily activities are being disrupted. 

- Severe slowdown on economy and buying power.

- Q4 FY20 will be facing lower revenue as Raya festival will fall in that quarter. 

Assuming the PE = 8 at the end of FY20. The target price should be RM 0.51. 

Stock price has trended down since early of Feb when Covid-19 outbreaks. Price has declined for 51% from Rm1.50 until now RM 0.725. The next support line is around  RM 0.655, the previous lowest point during the end of 2019. I will use Fibo method to trace the rebound momentum to find the next support and resistance points. 

FPI Q4 FY19 Review

FPI Q4 FY19 revenue came in above our expectations, revenue rose 17.7% from previous year's corresponding qtr of RM149.0mil to RM175.3mil thanks to higher sales volume and change in sales mix.

However, Q4 EPS was slightly below our target (Forecast Q4 EPS: 3.82) bringing the cumulative EPS of FY19 to 16.9sen which is below our expected EPS of 17.02sen (15% improve from FY18).

Dividend payout has increased 1sen compared to previous year, which bringing DY to 6.7% (RM1.63 stock price). 

 FY 19 FPI recorded higher tax and other expenses compared to FY18. Higher revenue recorded in FY19 was mainly due to the speaker sales contribution from FPI's major shareholder (Wistron), accounting for 25% of its overall revenue. We believe that Wistron will continue to purchase speakers from FPI. 

Comment:

Demands for speaker system is directly related to the global economic conditions. The outbreak of the novel coronavirus (COVID-19) has disrupted the global supply chain. Moreover, the board is also cautious about the operating challenges due to the virus outbreak. Hence, we expect a slow down in Q1 FY20 revenue. Our forecast for Q1 FY20 EPS (2.88sen) is reduced by 10% to account for the slower demand and higher overhead cost of its production lines. Thus, Q1 FY20 TP to be RM1.41 (RM1.52-RM0.11) PE maintain at 10. 

Technical Analysis:

Short term:

Next support line: RM1.62 (Fibo 0.618). 

Although the price has shown a strong momentum of rebound to 0.236 level after heavy sell down to RM 1.52, the weak market sentiment due to virus outbreak might turn FPI into bearish.

Long term:

Stock price is still in bearish trend. The price touched Fibo 0.50 level twice but unable to break through, RM 1.78 is a strong resistance line for FPI to break into bullish trend.   

Harta Q3 FY20 Review

Better profit due to higher sales volume!

Q3 report has recorded an increase of RM 73.1 mil or 10.1% on the group's sales revenue compared to corresponding quarter in preceding year. In the report explained that the higher sales revenue was due to increase in sales volume of 17.4%. 

PBT also improved 6.5% compared to corresponding quarter in preceding year from RM 150 mil to RM 159.7 mil mainly due to higher sales volume recorded during the current quarter. It was tallied to the increase in company's inventories recorded in Q2 report. 

Year to date, The Group achieved sales revenue of RM 2.146 billion, increased by RM 2.0 million or 0.1% from RM 2.144 billion recorded in corresponding period in preceding year. The higher sales revenue reported was mainly due to higher sales volume.

Profit before tax however eased by RM 19.5 million or 4.5% to RM 418.6 million as compared to RM 438.1 million in corresponding period in preceding year. The lower reported profit before tax was mainly due to lower average selling price and higher natural gas and R&D expenses. 

Q3 FY2020 vs Q2 FY2020

Revenue for the quarter amounted to RM 796.5 million, increased by RM 87.1 million or 12.3%. The higher sales revenue was attributed to higher sales volume for the quarter. Sales volume increased by 12.9%.

Profit before tax for the quarter increased by RM 22.3 million or 16.3% to RM159.7 million as compared with previous quarter mainly due to increase in sales volume and lower nitrile, chemicals, labour and electricity cost. 

Inventories has reduced by 8% from RM 303 mil from preceding quarter to RM 276 mil. Cash & cash equivalents also slightly reduced compared to preceding quarter.

 Total borrowing has reduced from RM 343.9 mil to RM 253.4 mil by 26%. 

Comment: 

Fundamental Analysis

As I explained earlier in Q2 review, sales orders for glove sectors will be locked in for around three months before the delivery of goods. Hence, from Q2 report I anticipated that increase in inventories was to prepare for orders secured and to be delivered in Q3. The increase in EPS was above my expectation as previous review I gave a 3.24sen EPS for Q3.

In current quarter, inventories has reduced compared to preceding quarter. We might see a slower growth in revenue in Q4 FY20. However, the recent on going coronavirus outbreak might boost up the group sales volume due to stronger demand on glove products. 

PBT for current quarter is not picking up with the revenue growth due to lower gross margin (19%) compared to preceding year with an overall gross margin of 22%.   

I anticipate that Q4 sales orders will still remain strong. Moreover, due to recent reduction in electricity cost on ICPT, a similar profit could be achieved in coming quarter. Hence, I estimate that the Q4 EPS could be maintained as 3.6sen by giving FY EPS to 12.99sen. 

By taking current PE of 49 or PE 38 (a year earlier) with a 30% growth. The TP would be RM6.36 - 6.63. 

Technical Analysis

Harta is in a major bullish trend, currently it is having a 3rd motive wave. I will continue to hold on my stocks to swim with the wave until the end. 

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.