Tailwind to lift furniture makers’ earnings

This article first appeared in The Edge Financial Daily, on July 3, 2017.
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KUALA LUMPUR: The government’s ban on the export of rubberwood effective this month would help to lift a cap on local furniture makers’ earnings growth. This is simply because with more supply of rubberwood moving forward, manufacturers would be able to meet their orders faster.

Furniture makers have been facing longer lead time, no thanks to rubberwood and foreign labour shortages. Analysts expect the export ban would at least ease one problem that the furniture industry is currently suffering.

For that, KAF Investment Funds Bhd chief investment officer Gan Kong Yik sees more upside potential in furniture stocks as he believes their current share prices have yet to factor in the latest news.

According to him, market sentiment has turned cautious amid pressure on the US market. “It would take some time for the furniture counters to digest this news,” said Gan. “I think furniture players like Poh Huat [Resources Holdings Bhd] and HeveaBoard [Bhd] should benefit from the policy; [their] valuation is cheap and [they] pay good dividends,” he said.

Poh Huat closed unchanged at RM1.95 last Friday, with a market capitalisation of RM418.73 million. The stock has gained 9.55% year-to-date (YTD) from RM1.78 at the start of the year. Meanwhile, HeveaBoard closed three sen or 2.17% higher at RM1.41 last week, bringing a market capitalisation of RM759.8 million. YTD, HeveaBoard’s share price has declined by 6% from RM1.50 on Jan 3 this year.

Gan said the ban helps the industry to address the raw material supply shortage and ease the cost pressure on rubberwood procurement.

Hong Leong Investment Bank Bhd research head Sia Ket Ee views that earnings prospects of wood-based manufacturing players remain bright in the second half of the year, underpinned mainly by continued weakness in the ringgit and lower raw material costs.

“All in all, we opine that the latest development is positive for wood-based manufacturers in Malaysia, as the ban on rubberwood will alleviate [the] supply shortage of rubberwood in the country, hence easing the raw material cost pressure,” he wrote in his latest research note.

A bulk of the furniture makers’ earnings are denominated in US dollars and the new export ban of rubberwood will now increase domestic supply.

Apart from Evergreen Fibreboard Bhd, Sia is also upbeat about Homeritz Corp Bhd as the company is in expansion mode which would possibly mean stronger future earnings growth.

“We believe that [the expected] sustained US dollar strength will provide a favourable environment for Homeritz to mitigate rising costs of doing business,” he said.

Sia has a target price of RM1.05 for Evergreen and RM1.18 for Homeritz. He asserted a “buy” call for both counters.

Last Friday, Evergreen closed unchanged at 84 sen, valuing it at RM710.67 million, while Homeritz settled 1.5 sen or 1.64% higher at 93 sen, giving it a market capitalisation of RM277.51 million.

Minister in the Prime Minister’s Department Datuk Seri Dr Wee Ka Siong last week announced that the government had decided to ban rubberwood exports effective Saturday to ensure an adequate supply of the raw material for the local furniture industry.

Wee was quoted by the media as saying that Malaysia’s rubberwood exports were estimated to be worth up to RM300 million a year compared with the furniture exports of RM9.5 billion annually, hence the ban is important to ensure priority be given to the local furniture industry.

TA Securities senior research analyst Ooi Beng Hooi concurred, and explained that there were few main difficulties faced by wood-based furniture makers in sourcing rubber logs in the first quarter of 2017, compared to a year ago.

“Firstly, the abnormal weather at end-2016 to [the] first quarter of 2017 deterred the progress of lumbering rubber logs, which in turn affected supply; secondly, rubber prices were higher at end-2016, so estate owners generally saw little incentive to lumber rubber trees and preferred to continue their tapping activities,” he said.

Other than HeveaBoard, Ooi said counters like Jaycorp Bhd, Lii Hen Industries Bhd, Latitude Tree Holdings Bhd and Evergreen are counters that would potentially benefit from the new policy.

Another analyst, who declined to be named, mentioned that the cut in the government grant for replanting rubber trees also affected the supply earlier this year.

“We understand that there was a cut in government grant. Naturally, this would also be part of the reason for [the] supply shortage,” he explained.

In the first parliamentary meeting in March this year, Plantation Industries and Commodities Minister Datuk Mah Siew Keong told opposition lawmaker Datuk Ngeh Koo Ham (DAP-Beruas) that the government’s replanting grant for rubber and oil palm smallholders will be reduced to RM540 million or RM108 million a year under the 11th Malaysia Plan (2016 to 2020).

Under the 10th Malaysia Plan (2011 to 2015), the grants allocated RM1 billion in total or an average of RM200 million a year, and Ngeh added that only RM30 million in replanting grants were allocated this year to 550,000 oil palm smallholders and 450,000 rubber smallholders.