This article first appeared in The Edge Malaysia Weekly on December 11, 2017 - December 17, 2017

FURNITURE makers that have had a good run in the past few years, especially in 2015, on the back of a weaker ringgit are seeing changing fortunes as the local currency gains strength against the greenback and operating costs increase.

A common grouse in the industry is the increase in raw material and labour cost. Labour scarcity seems to be another issue. Now, the strengthening ringgit has affected the profit margins of export-oriented furniture makers that transact mainly in US dollars.

This has been reflected in the downward trend in the share prices of most furniture makers this year with the exception of Lii Hen Industries Bhd, which has risen 18.56% since the beginning of the year, and Poh Huat Resources Holdings Bhd, up by a marginal 1.73%.

A Poh Huat Resources spokesman tells The Edge that it may not be so rosy for the cyclical furniture industry going forward. “The US market is showing some signs of softness. The housing market has had a good run over the last four to five years and there’s only so much furniture one can buy.

“There is also a changing trend in the US market whereby the younger generation opt for more affordable, panel-based furniture rather than the traditional solid wood furniture that is more expensive. So, margins will suffer a little.”

In the last 18 months, Poh Huat has been seeing greater demand in the US market for its panel-based furniture, which is made in Malaysia, than for its solid wood furniture, which is manufactured in Vietnam.

The softer US market and changing trends, plus the lack of an “extra push” from a stronger US dollar that had benefitted many furniture manufacturers previously, is a double whammy for the industry, the spokesman says.

“It is part and parcel of the business cycle; it follows the housing sector in the US. It is a matter of how well manufacturers can adapt to the market [and] we need to be adaptable to the changes,” he says.

From the beginning of the year till last Thursday, the ringgit had strengthened by 8.86% to 4.08 against the US dollar.

Poh Huat’s net profit for the third quarter ended July 31, 2017, contracted marginally by 3% to RM9.65 million from RM9.99 million a year ago. The profit margin for 3Q2017 fell to 6.4% compared with 8% a year ago. Nevertheless, for the nine months, net profit rose 35.46% to RM37.93 million while revenue rose 15.5% to RM442.58 million.

Meanwhile, Latitude Tree Holdings Bhd managing director Joseph Lin was quoted as saying recently that he was not expecting higher revenue for its financial year ending June 30, 2018, after its previous two record-breaking years.

He added that as the ringgit further strengthens, he is expecting revenue to decline further. Latitude Tree exports its products mainly to the US. For its first quarter ended Sept 30, 2017, its net profit shrank 27% to RM15.41 million from RM21.09 million in the previous year. Like Poh Huat, Latitude Tree’s profit margin for 1Q2018 was lower at 7.1% compared with 10.3% the previous year.

Heveaboard Bhd, which manufactures, trades and distributes particle boards and particle board-based products as well as ready-to-assemble furniture products, had told The Edge Financial Daily in a previous interview that it foresees a tough ride in sustaining profit growth this year.

JF Apex Securities Research had said in a research report that Heveaboard is actively seeking solutions to address the foreign worker shortage for its ready-to-assemble furniture segment. The research house added that it doubts Heveaboard could take on more orders of new veneer-based products from Japan next year.

For the third quarter ended Sept 30, 2017, Heveaboard’s net profit contracted 58.4% to RM7.17 million from RM17.23 million a year ago. For the nine months, earnings shrank 7.4% to RM48.8 million although revenue grew 4.35% to RM411.99 million.

Nevertheless, JF Apex believes that the medium to long-term outlook for the company remains intact.

“We reckon Heveaboard is a fundamentally sound company underpinned by its excellent track record, resumption of earnings growth in 2018F banking on sales of higher value-added and premium products, sturdy balance sheet with net cash position and decent dividend yield of over 4%,” it says.

With furniture makers facing compressed margins from rising costs, could increasing the selling prices of products be an option?

“Furniture is not a commodity. It is a dangerous game if one relies on just the pricing models to increase profits,” says Areca Capital CEO Danny Wong.

The Poh Huat spokesman explains that there isn’t much room for negotiation with buyers on pricing when it comes to older products. For newer products, manufacturers and buyers can sometimes agree on changing some specifications at the same price.

Wong says export-oriented companies that rely on foreign currency differences to boost sales will be in a dilemma if their cost structure is not managed properly.

“The thematic cycle for furniture stocks has ended. If the company’s’ earnings were mainly boosted by foreign exchange differences, with no expansion to the operations, then it would be a problem. However, if they were boosted by business growth, then it is still sustainable,” he explains.

While most furniture makers have shown signs of slowing growth, Homeritz Corp Bhd, which specialises in upholstered furniture, catering for the higher end of the market, is still going strong. Net profit for its fourth quarter, ended Aug 31, 2017, jumped 52.7% to RM7.01 million from RM4.59 million in the previous year.

Lii Hen, for which the US is a major export market, also beat the odds with net profit growing 20.3% to RM19.47 million in the third quarter ended Sept 30, 2017. on higher sales volume. For the cumulative period, net profit rose 7.2% to RM58.2 million, with revenue increasing 17.1% to RM532.6 million.

In its notes to its financial statements for 3Q2017, Lii Hen warned that while orders from the US were strong, the stronger ringgit against the greenback would substantially affect its performance in the final quarter.

“We remain positive on Lii Hen’s earnings outlook as the group continuously focuses on diversifying its product range to strengthen its market position, adopting effective cost management and looking for automation opportunities for its production lines,” Hong Leong Investment Bank Research says in a report.

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