This article first appeared in The Edge Malaysia Weekly on February 5, 2018 - February 11, 2018

WITH Federal Furniture Holdings (M) Bhd’s (FFHB) share price having dropped more than 50% over the last 24 months — wiping out RM42 million of its market value — is it time to pick up the stock?

To put things into perspective, FFHB’s current market capitalisation of RM55 million — based on its closing price of 51 sen last Tuesday — is actually lower than the RM60 million it paid for related construction company Pembinaan Masteron Sdn Bhd (PMSB).

FFHB managing director Datuk Choy Wai Hin believes that at the present level, it could be a good time for investors to look at the 50-year-old premium furniture maker that ventured into construction in November 2016.

“Our shares are undervalued, and there is upside potential going forward. For those who understand our business model, it is time to look at us with a medium to long-term outlook,” he tells The Edge in an interview.

“But I dare not say our share price will not drop further because at the end of the day, it is all subject to market perception,” he remarks.

FFHB shares are currently trading at a trailing 12-month price-earnings ratio of 15.8 times and price-to-book value of 0.6 times.

In a move to support its share price, FFHB has been actively buying back its own shares since last September. Over the past five months, it has purchased 1.43 million shares, representing 1.31% of its share base.

“Our treasury shares level is only at 1%. Obviously, we can do more, but it also depends on many factors. For instance, we need to conserve cash,” Choy says.

FFHB was last seen buying its own shares between Dec 18 and 20, when it purchased 41,200 shares at 59 sen to 60 sen apiece. Certain quarters are wondering why it has stopped buying at the current lower level.

Commenting on that, Choy says FFHB needs to strike a balance between supporting the share price within its capability and keeping its gearing low. Its net gearing was at 0.8% as at Sept 30 last year. “In hindsight, things always seem perfect. When we were buying at over 60 sen, we thought it was a steal, but now that it has dipped further, should we go in again? If we do that, we have to be mindful of our working capital.”

As at Dec 29 last year, FFHB was 35.4% owned by the Choy family. FFHB — which was founded by Choy’s father, executive chairman Datuk Dr Choy Fook On, in 1962 — is the sole approved vendor of store sets for the Starbucks Coffee chain in more than 10 countries in Asia-Pacific. Its other clients include YES Store and Coach Factory Outlets Store.

Besides furniture manufacturing and exports, FFHB undertakes interior fit-outs (IFOs) for hotels such as St Regis, JW Marriott KL and The Ritz-Carlton KL. The group also operates Kitchen Plus, Malaysia’s largest kitchen and appliance superstore.

Construction business, however, is FFHB’s income booster in the immediate term.

To recap, in late 2016, FFHB bought a 60% stake in PMSB from the Choy family for RM33 million. Last month, the group acquired the remaining 40% stake in PMSB for RM27 million.

“The initial acquisition of a 60% stake in PMSB was a prelude to the takeover. At first, we were not fully assured of the benefits. But later, it became clear that this was exactly what we wanted,” Choy explains.

“With that in mind, we took the full benefit of PMSB as we need to keep the ball rolling by giving an immediate boost to FFHB’s profitability.”

Earnings visibility backed by Masteron

PMSB is a construction company that gets 100% of its work from Masteron Sdn Bhd, a non-listed property firm controlled by the Choy family.

It is worth noting that Masteron has a portfolio of ongoing and planned property projects with a gross development value of more than RM3 billion. These developments are expected to keep it busy for the next 10 years.

Choy highlights that FFHB’s move to make PMSB its wholly-owned subsidiary will allow the listed parent company to consolidate the non-listed construction outfit’s earnings in full.

“The full benefit of acquiring PMSB will kick in this year. We (PMSB) will be awarded contracts worth RM300 million to RM500 million by Masteron every year for the next five years. Year in, year out, our plate will be quite full,” he says.

This year, Masteron will be awarding RM496 million worth of contracts to PMSB. These jobs are expected to be completed in the next 36 months.

PMSB has also been invited to quote for projects with an estimated value of RM494 million that could be awarded in the next 24 months. The projects include main building works for Koi Residences and Koi Prima in Puchong, Verando Residences in Petaling Jaya and J Tower in Kuala Lumpur.

Choy is confident that the acquisition of PMSB, with an outstanding order book of about RM226.8 million, will enable FFHB to enhance its profitability.

It is interesting to note that initially, his family gave a net profit guarantee of RM7 million a year and FFHB’s 60% share of the profit would work out to RM4.2 million.

Following the acquisition of the remaining stake in PMSB, the Choy family raised the net profit guarantee to RM8 million for the financial year ending June 30, 2018 (FY2018), as well as an aggregate net profit of not less than RM16 million for FY2018 and FY2019.

In 2016, FFHB changed its financial year end from Dec 31 to June 30, hence, its previous set of full-year results was from Jan 1, 2016, to June 30, 2017 — a period of 18 months (18MFY2017). The group generated a net profit of RM6.6 million in 18MFY2017 on revenue of RM208.8 million.

The performance of FFHB’s non-construction-related businesses weakened in the previous financial year as the local IFO market was competitive, leading to low margins.

Based on FFHB’s audited financial statement for FY2017, the annualised net profit from the furniture manufacturing and trading segment declined 8% to RM4.89 million from RM5.34 million in its financial year ended Dec 31, 2015 (FY2015).

The renovation and interior design segment recorded a loss after tax of RM90,000, compared with a net profit of RM1.31 million in FY2015.

The newly acquired construction business is expected to reduce FFHB’s dependency on its existing core business, which is in line with the group’s plan to diversify its revenue streams.

Choy does not discount the possibility of injecting Masteron’s property business into FFHB in the future, but there are no such plans for now.

“The injection of PMSB has been 15 years in the making as we have been discussing it on and off among family members. It is a question of valuation and timing. So far, it has gone very well. To me, it is a good indication of more things to come,” he says.

If FFHB can establish itself as a company that delivers both consistent earnings growth and steady dividends, it should not be short of investors in the long run.

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