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. 

VS Q1 2020 Review

Brighter Performance ahead!

For the current quarter under review, the Group recorded a revenue of RM1,034.6 million, a decrease of RM38.3 million from RM1,072,931 million as compared to the previous year corresponding quarter, largely due to lower contribution from China. Profit before tax, meanwhile, increased 40.5% or RM18.4 million to RM63.7 million over the same period.

The report mentioned that, the improved earnings for the current quarter 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, coupled with the absence of loss on disposal of a subsidiary amounting to RM5.4 million recognized in the preceding year corresponding quarter.

Malaysia segment posted a marginal decrease in revenue of RM4.2 million in the current quarter by comparison to previous year corresponding quarter. In tandem with the decrease in revenue, profit before tax dropped by RM1.3 million over the preceding year corresponding quarter. Profit before tax margin was relatively stable. 

Indonesia segment recorded profit before tax of RM1.1 million for the quarter under review as compared to loss before tax of RM1.3 million in the preceding year corresponding quarter mainly due to better product sales mix. 

China segment recorded a lower revenue for the current quarter as a result of lower sale orders completed. Losses narrowed significantly during the quarter under review due to lower operating expenses incurred following streamlining activities and adopting an asset light model with lower gearing structure. Additionally, there was also the absence of loss on disposal of a subsidiary amounting to RM5.4 million recognized in the preceding year corresponding quarter. 

For the current quarter under review, the Group recorded a higher profit before tax of RM63.7 million as compared to RM48.9 million in the preceding quarter, mainly attributable to the absence of impairment loss on plant and equipment of RM22.1 million provided by the operations in China as well as refund of investment cost of RM7.9 million from an associate. 

Referring to the latest asset and liabilities statement, trade and other receivables has increased 12% to RM1,116.936 million. Higher trade receivables is not good to company outlook. It will cause management to initiate impairment losses or write off on those payment that unable to collect back which further affect the financial performance. 

Loan and borrowing has slightly increased. Trade and other payables have reduced. 

Sales order has picking up lately, after the decline in sales orders from key customers in Indonesia segment during FY19, the management has bringing in more new sales orders to fill up the capacity. Hence, the better performance in Indonesia segment is mainly due to better product sales mix as mentioned earlier.  

Over china, the business is still remained challenging. Sales orders have contracted since early FY19 until now, but the losses in profit has narrowed down. 

Comment:

I forecast that FY2020 sales orders will remain stable and similar to FY19 performance as the overall consumer and business sentiments is lacklustre. However, a good point we can look forward in this financial year is the absence of impairment loss in china segment. 

PBT of FY19 is RM174.006 million. After excluding the impairment loss of RM5.4million recoginized in Q1 FY19 and RM22.1million in Q4 FY19, the overall PBT for FY19 should be RM201.506million. The EPS would be 10.07sen. Therefore, I reckon that the cumulative EPS for FY2020 would be similar to 10.07sen. Using PE of 15, the TP should be RM1.51 with curent price of RM1.32(14% upward). 

I will give a buy call for VS due to the coming quarter performance will definitely be better than Q2, 3 and 4 of FY19 with the picking up of sales orders from Indonesia segment.  

Wellcall Q4 2019 Review

Quarter Performance Within Expectation!

Q4 revenue contracted 9% from RM45.561mil to RM41.427mil due to slow down in local market and export market by 31% and 6% respectively compared to preceding year corresponding quarter. According to Inter-pacific research, the local market demand is related to construction sector activities.

We can see that for the full FY19 the sales order from export market has improved by 1.7% compared to FY18. However, Q4 has seen reduction in few regions; Middle east, Europe and Australia/NZ. With the current lackluster global economy and US China trade dispute, I might see a further contraction on future order.

Despite lower revenue earned for the current quarter ended 30 September 2019, the Group able to maintain its fairly consistent PBT of RM13.031 million as compared to PBT of RM13.237 million recorded in the corresponding quarter ended 30 September 2018 mainly due to operational efficiency arising from effective cost management and productivity.

The Group successfully sailed through the volatility of global industrial rubber hose market, recorded revenue of RM170.109 million in current financial year with slight decrease of approximately RM1.015 million (1%) as compared to previous financial year of RM171.124 million. The export and local market contributed approximately 91% and 9% respectively to the Group's annual revenue.
The overall revenue achieved remain fairly consistent with previous financial year was mainly attributable to continuous orders and market demand for industrial rubber hose.

The Group recorded a high PBT of RM49.532 million for the current financial year ended 30 September 2019 as compared to PBT of RM42.844 million recorded in preceeding financial year, representing an improvement of RM6.688 million (16%) increase. Higher PBT achieved was mainly due to constant operational efficiency arising from effective cost management, primarily resulted from productivity.

Full year EPS is within my expectation which I reckon to achieve 7.37sen. Despite the slow down in sales order, Wellcall can still present a higher gross margin after all. This has proven the capability of the management in managing their operation efficiently. Moreover, Management has issued a total of 5.65sen dividend full year which is equivalent to 5.04% DY. 

Healthy cash flow, it is actually a cash cow company. No debt no loan. Moreover, recently Wellcall has invested together with Trelleborg Holding for their JV company. 

Technical analysis

 The latest technical chart has shown that price has broken below the descending triangle trend. Meaning that it will be another wave of sell down. Overall trend is still bearish. I will just monitor at the moment without any buying action. As the new down trend is just initiated. It might partly due to the uncertainty of Wellcall future business order. Although 5% DY and price at 52 weeks low is quite attractive. I will wait for the Q1 FY2020 report to make buying decision. 

Harta Q2 FY2020 Review

Harta reported a 0.7% drop in revenue to RM 709.424 mil for the second qtr from RM 714.244 mil a year ago. Net profit however dropped by 13% to RM 103.867 mil. The reduction in sales revenue was attributed to lower average selling price and higher packaging and natural gas cost have dragged PBT to close lower.

Recall that natural gas prices were revised upwards abruptly by an average of 5.3% in July and glove makers were unable to adjust their ASPs immediately given the short notice. On top of that, the fact that the orders were locked in about three months before the delivery of goods also contributed negatively to the margins.

1.80 sen of dividend declared for 1HFY2020 compared to preceding year has reduced by 18% which is in line with 19% lower of net profit achieved for the 1HFY2020 at RM 197.930 mil compared with RM 245.09 mil for the same period a year ago. (Dividend declaration is interrelated to net profit of the group)

Lower profit before tax is due to lower ASP and higher operating cost (Higher packaging & natural gas cost)

Asset and Liabilities sheet remains healthy. Inventory has slowly picking up for this quarter compared with Q1 FY20 where inventories was amounting at RM 288.072 mil; an increase of 5.2%.

Q1 FY 2020

Q2 FY 2020

From cash flow statement, the group has started to purchase more inventories. I anticipate that Harta will have more orders during year end. Hence, the management started to procure more stocks to cope for their production.

Revenue for the quarter amounted to RM 709.4 million, increased by RM 69.3 million or 10.8%. The higher sales revenue was attributed to higher sales volume for the quarter. Sales volume increased by 12.7%.
Profit before tax for the quarter increased by RM 15.7 million or 12.9% as compared with previous quarter mainly due to increase in sales volume and lower upkeep and labour cost.

Group Prospect:

In line with growing rubber glove demand globally, Hartalega will continue with its NGC capacity expansion plans. Plant 5 of NGC facility was fully commissioned during the quarter. First line of Plant 6 is expected to begin commissioning in the 1st quarter of Year 2020 and will have an annual installed capacity of 4.7 billion pieces. Plant 7 which has commenced construction will cater to small orders focusing more on specialty product and will have an annual installed capacity of 3.4 billion pieces. With the progressive commissioning of Plant 6 and 7, Hartalega’s annual installed capacity is expected to increase from current 36.6 billion to 44.7 billion pieces by FY2022.

While market demand has picked up in the second half of 2019, business environment continues to remain challenging with rising operating cost. In line with this, Hartalega will continue to embark on cost optimization to mitigate potential margin pressure. In addition, Hartalega will also intensify investment into Industry 4.0 technologies to develop automation solutions, IoT technology & AI solutions in order to reduce dependency on manual labour and enhance operation effectiveness.

Hartalega has recently launched its antimicrobial gloves in Shanghai, China. The Company will continue to market the product in other emerging markets as well as working on securing Federal Drug Administration (FDA) approval for the US market. As the new medical product is in its introductory and educational phase, we expect AMG to contribute more significantly in the coming years.

Moving forward, Hartalega remains optimistic of the longer term prospects underpinned by growing demand for rubber gloves, ongoing NGC expansion and potential growth of AMG sales.

Comment:
The recent news that the additional 15% tariff imposed by the US on Chinese-made medical gloves that came into effect on Sept 1 will increase the average selling price, if Harta can capture the demand I reckon that the Q3 FY 20 result will be much more better. Although USD has weaken against RM starting from Oct, this effect will be cushioned by lower material cost for Nitrile glove from crude oil price.

By estimating the sales will grow similar to the increase in inventories also production utilization rate to run at more than 90%. I presume a 5% increase in Q3 FY20 EPS to achieve 3.24sen from preceding quarter and another increase of 2% in Q4 FY20, contributing by the newly commission production lines in plant 6 which will calculate for 3.30sen of EPS.

Hence, overall full year forecast EPS for FY2020 I am looking at a summation of 12.44sen (5.90sen + 3.24sen (F) + 3.30sen (F)), compared to FY 2019 EPS stands at 13.72 sen. Forecast FY20 EPS will be 9.3% lower than preceding FY19 EPS.

By taking worst case scenario P/E 38 during Q4 FY19, the target price for FY 20 full year is RM4.72. Currently, the stock price has moved to RM5.25 (13/11/19) and it is over priced. Comparing to current P/E at 43, the estimated target price is  RM5.35.

Target Price = RM4.72~RM5.35

A hold call for Harta, price is still within target price, without much gap of price improvement, however I still believe in company's prospect as AMG will soon be the next game changer in glove industry.

Homeritz Q4 2019 Review

A disappointing quarter result!

While market sentiment believe Malaysia furniture sectors will likely be benefited from US China trade tension, the group has reported a fall of 16.18% and 34.63% on its revenue and PBT for Q4 FY2019 compared with the corresponding period of the last financial year.
The management explained in qtr report that this was mainly attributed to the decrease in volume sold. The number of container shipped out decreased by 21% and 13% respectively for Q4FY2019 and FY2019.

In FY 2019, the Group achieved a slight increase in net profit of 1.7% to RM27.7 million despite a

11.26% decrease in revenue to RM147.7 million. This was mainly attributed to the strengthening

of USD and lower unit price of certain raw materials purchased compared with FY 2018. 

Homeritz business is very relying on currency earning. Although profit has been improving compared to last year, the reduction in revenue has threaten the company's future prospect. 

The Group’s revenue for the Q4FY2019 decreased by 10.4% as the result of decrease in volume sold. The number of container shipped out decreased by 15% for Q4FY2019 as compared to Q3FY2019.

The PBT for Q4FY2019 decreased by 33.34% compared with Q3FY2019. This was mainly attributed to the lower volume of products sold to customers, which resulted in lower economies of scale and the one off expenses of about RM188K in relation to the Proposed Bonus Warrants incurred in Q4FY2019. 

Gross profit margin has also reduced from 18% (Q3 FY19) to 13% (Q4 FY19), which is the lowest throughout the year. 

Recent news reported Homeritz has managed to secure 8 new sales orders from US customers. The group is planning to expand its production line to cater for those new orders in 3 to 5 years time. 

However, it will not directly reflect in the next financial year performance. Hence, the drop in sales in FY19 has revealed that actions from management team are lagging behind. New sales orders are unable to catch up with the drop/slowdown in sales from existing customers. 

I forecast that gross profit margin will remain weak in coming FY2020 with the TP at RM0.57 with a 10% discount on its EPS (6.35sen) and PE stands at 9. 

Technical Analysis: 

A weak financial report without any good future prospect can hardly maintain the uptrend momentum. Hence, we look at the first support line at RM 0.64 (MA200) and second at RM 0.60 (double bottom) for signals of bearish trend.