Cash-rich Focus Lumber catches investors’ attention

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focus-lumber-chart_26_1060SABAH-BASED plywood manufacturer Focus Lumber Bhd, whose cash pile and dividend payment have increased steadily in the last five years, has caught investors’ attention.

Amid the positive sentiment on furniture-related companies, which are benefiting from the strong US dollar, Focus Lumber has seen its share price climb about 46% year to date. It hit an all-time high of RM1.50 last Wednesday, giving it a market capitalisation of RM154.8 million.

The company is debt-free and its hoard of cash stood at RM59.4 million as at Dec 31, 2014, which translates into cash per share of 57.5 sen. Essentially, at its current share price of RM1.50, the investor is paying only

92.5 sen per share or less than six times its 2014’s earnings per share (EPS) of 15.53 sen.

Focus Lumber had retained earnings of RM78.05 million as at the end of last year, up from RM70.27 million a year ago. The cash-rich company paid a dividend per share (DPS) of eight sen in 2014 and 2013, after paying six sen in 2011 and 2012 (see table).

As its cash pile grows, market observers expect Focus Lumber to either expand its operations, acquire for growth or reward its shareholders with more generous dividends.

“I wouldn’t be surprised if Focus Lumber decided to pay a bumper dividend or proposed a bonus issue in the future as the company has sufficient cash to run its regular businesses,” an observer says.

According to theedgemarkets.com, the likelihood of a corporate exercise at Focus Lumber (fundamental: 1.75; valuation: 2.4) is high. It was also picked by The Edge Research as a stock with momentum in February and March.

When contacted, Focus Lumber managing director Lin Hao Wen declined to be interviewed.

A corporate observer who tracks Focus Lumber closely points out that the stock’s valuation is still cheap despite the recent spike in its price.

The counter is trading at a price-earnings ratio (PER) of 9.6 times based on EPS of 15.53 sen in the financial year ended Dec 31, 2014 (FY2014) and the all-time-high close of RM1.50 last Wednesday.

In comparison, the company’s peers Jaya Tiasa Holdings Bhd and Ta Ann Holdings Bhd are trading at a PER of 28.3 times and 11.7 times respectively.

“As Focus Lumber also falls under the furniture and flooring sector, we see more upside for the counter. The growing demand for plywood is good for the company. The only setback is the stock’s low liquidity with a free float of merely 8%,” says the corporate observer.

Focus Lumber’s 2013 annual report shows that its 30 largest shareholders owned 91.47% of the company as at April 10, 2014.

The list of top 30 shareholders also shows that Focus Lumber is jointly controlled by three Taiwanese families that collectively hold at least a 64.8% stake in the company.

The Lu, Lin and Yang families own 26.4%, 23.25% and 15.15% of the company respectively.

In the Lin family, Hao Wen, his father Lin Fong Ming and his brother Lin Hao Yu each has a 6.12% stake in the company while in the Yang family, Yang Chien Chih and his three sons, Yang Sen, Yang Wei Szu and Yang Hsi Hsien, each has a 3.06% stake.

In the Lu family, Lu Kuan Cheng has an 8.97% stake in the company while his father Lu Wei Hsu and grandfather Lu Chin Ting own 4.28% and 7.34% respectively.

Yang Sen and Kuan Cheng are the group’s executive directors.

In the past two years, Focus Lumber paid out eight sen per share, giving investors a dividend yield of 5.3%. It has not gone unnoticed that the major shareholders are the largest beneficiaries of the generous dividends. The payout ratio has been more than 50% of net profit in the last three years.

Listed on the Main Market of Bursa Malaysia in April 2011, Focus Lumber specialises in the manufacture and sale of plywood, veneer and laminated veneer lumber, exporting 92.5% of its products, of which 67% went to the US market in 2013. The other markets are India, South Korea and Taiwan.

Focus Lumber’s products are used mainly in home decorating, construction and housing materials.

A weaker ringgit against the greenback is favourable to exporters, for example Focus Lumber, whose profit margin is expected to improve because its exports are mainly denominated in US dollars.

Its annual revenue was steady at between RM120 million and RM147 million from 2010 to 2013, resulting in a net profit of between RM10 million and RM15 million during the period.

In FY2014, net profit grew 5.92% to RM16.03 million while revenue rose 2.1% to RM150.4 million, thanks to higher margins and favourable exchange rates.

Possibly taking advantage of the skyrocketing stock, Focus Lumber’s substantial shareholders took profit by divesting some shares.

Chen Chun Hsiung, who used to be the single largest shareholder with an 8.95% stake, sold 5.6% in the past 12 months and consequently ceased to be a substantial shareholder. Meanwhile, Wei Hsu and Hao Yu sold 4.11% and 0.02% respectively.

It is worth noting that the 27-year-old Kuan Cheng was appointed executive director this month, replacing Lin Lieh Ming. The 56-year-old Lieh Ming, who is Kuan Cheng’s uncle, had resigned in November last year, citing poor health.

A research analyst says the selldown by the major shareholders and the boardroom changes at Focus Lumber indicate an internal restructuring.

The company’s structure comprises mostly individual shareholders, none of whom has more than a 10% stake. “More than 10% stakes were sold by the major shareholders but a new shareholder has yet to emerge. It would be interesting to see who the buyer of these shares is,” the analyst says.

The new shareholding structure of Focus Lumber will be seen in its 2014 annual report, which is expected to be published at end-April.

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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. Go to www.theedgemarkets.com for details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 30 - April 5, 2015.