Thursday 28 Mar 2024
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CLASSIC SCENIC BHD, a wooden picture frame moulding manufacturer, is gearing up to take advantage of improving market conditions by moving upstream and downstream simultaneously.

With over 80% of its revenue coming from the US market, the company was badly hit during the 2008 global financial crisis. Now, it is looking forward to an economic recovery there.

“We will introduce more innovative and marketable wooden picture frame mouldings to the market. Also, we will look at upstream and downstream ventures, which are related to our core business, in the short to medium term,” Classic Scenic financial controller Lim Kim Lee tells The Edge.

By “upstream venture”, she means that the company intends to set up a sawmill on its land in Ulu Yam, Selangor.

It is currently applying for the relevant permits for the sawmill and expects it to be operational in 1 to 1½ years’ time.

“The budgeted capital expenditure (capex) for upstream activities is around RM2 million to RM3 million, to be invested over two years,” says Lim.

Classic Scenic is hoping that by going into upstream activities, it will save on timber costs, which currently account for about 30% of the selling price of its products.

“By sourcing logs [instead of sawn timber], we believe our cost can be brought down by at least 15% to 20%, as all timber sizes/lengths cut from logs can be optimised,” she says.

Sawn timber is typically more expensive as sawmills factor in wastage into the price, she adds.

Meanwhile, the move to downstream activities will see Classic Scenic begin production of wooden frames.

“We currently manufacture wooden picture frame mouldings of 8 to 11 feet and export them to custom framing retailers or distributors. They command a higher price,” says Lim.

“Short wood is usually used for wooden frames. Therefore, with log sourcing, our timber cost will come down, and it will enable us to compete in and penetrate new markets.”

However, the capex will not significantly affect the company’s cash position and its ability to pay dividends, she adds.

As at March 31, 2015, Classic Scenic’s cash and cash equivalents stood at RM20.7 million. It had no borrowings and its current trade payables stood at RM1.6 million and financial liabilities, RM1.7 million.

The company has a 50% dividend policy but has been consistently paying out over 90% of its net profits for the past six years (see table).

For the financial year ended Dec 31, 2014 (FY2014), Classic Scenic posted an 11% year-on-year growth in net profit to RM10.1 million on the back of a similar rise in revenue to RM58.4 million. On average, the company has a 17% net margin and FY2014 was no different.

According to Lim, more than 80% of the company’s revenue comes from the US market, followed by Australia (6%) and Japan (5%).

A sizeable 34% of the revenue is attributable to just three customers in the US — Michaels Stores, Hobby Lobby Stores and Larson-Juhl — which are home decor retailers.

“We will continue to focus on the US market in view of the improving economic conditions there while the situation in other regions remains subdued,” she says.

She adds that the US remains the largest and most lucrative market for wooden picture frame mouldings.

“The US economy, which is driven by consumer spending, has not fully recovered from the 2008 financial crisis, and we believe that with the strengthening household balance sheet, improving housing market, more favourable market conditions and lower unemployment rate, consumer spending and retail sales will go up,” Lim says, adding that Classic Scenic will ride these macro opportunities by innovating its products.

Since January, interest in the stock has picked up, with its price rising 17% when it hit a high of RM1.40 in April.

It has since retreated to close at RM1.26 last Thursday, giving the company a market capitalisation of RM152 million.

The Edge Market Research has placed a fundamental score of 2.25 out of 3 on Classic Scenic, and a 2 out of 3 valuation score.

The relatively high fundamental score reflects well on the strength of its balance sheet, taking into account its return on equity (ROE) of 11.18%, net margin of 17.6% and gearing, among other things.

Classic Scenic also has a strong valuation score, based on its price-earnings (PE) to growth ratio (0.83 times), PE/ROE (1.32 times), price/net asset value (1.62 times) and high dividend yield (6.35%).

Classic-Scenic-Financial-History_Table_18_1072_theedgemarkets


Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on June 22 - 28, 2015.

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