This article first appeared in The Edge Financial Daily on June 28, 2018

Poh Huat Resources Holdings Bhd
(June 27, RM1.30)
Maintain buy with a lower target price (TP) of RM1.64: Poh Huat Resources Holdings Bhd registered a slightly lower revenue by 1.3% year-on-year (y-o-y) of RM287.4 million for the first half ended April 30, 2018 (1HFY18), mainly attributable to lower sales from its Vietnamese operations, given the weaker Vietnam dong to the ringgit but partially offset by higher sales from the Malaysian operations due to continued strong demand for the panel-based bedroom sets for the US market and traditional office furniture.

Its earnings before interest, taxes, depreciation and amortisation margin weakened in the 1HFY18 by 5.1 percentage points  to 8.5% as both Malaysian and Vietnamese operations experienced margin compression partly due to the strengthening of the ringgit against the US dollar, which resulted in lower selling prices for its products in ringgit terms, and an increase in raw material costs and direct labour costs.

The dollar closed at RM3.92 as at April 30, 2018 versus RM4.34 a year ago. Also to note, Poh Huat has come to an agreement with its insurer for fire-insurance compensation of RM4.3 million for the fire incident at its Malaysian plant back in January 2018.

Taking into account the total net book value of RM3 million for the assets damaged by the fire, Poh Huat recorded a net gain of RM1.3 million.

After excluding one-off items, 1HFY18 core net profit amounted to RM19.7 million, lower by 32.7% y-o-y. Its 1HFY18 core net profit was below expectations, accounting for 36.4% of our previous financial year ending Oct 31, 2018 (FY18) forecast and 40.1% of street expectations.

The variance was due to lower-than-expected margins due to higher raw material costs. Poh Huat has declared a dividend per share of two sen for the quarter.

Given the weaker-than-expected set of results, we are cutting our FY18 to FY20 core earnings per share (EPS) forecasts by 10% to 17%, mainly to account for higher production costs given the increase in raw material and labour costs.

Due to our earnings revision and a lower target price-earnings ratio (PER) of seven times (based on latest average PER multiple of the furniture sector; from nine times previously) on our 2019 core EPS (rolling over our valuation base year), our TP for Poh Huat is now lowered to RM1.64.

We maintain our “buy” call, as we opine that valuation looks attractive now at 6.3 times/5.5 times of FY18/FY19 core EPS. — Affin Hwang Capital, June 26