This article first appeared in The Edge Malaysia Weekly on January 11, 2021 - January 17, 2021

ABOUT a year ago, office furniture manufacturer Euro Holdings Bhd saw the emergence of SPA Furniture (M) Sdn Bhd — a unit of Melaka-based SPA Group — as its single largest shareholder after the purchase of a 51% stake for merely 20 sen per share. Fast forward to today, the company is no longer a penny stock but is worth more than RM3 billion, based on its closing price of RM4 last Friday.

Owing to the sharp increase in share price since the change in management, Euro Holdings has been queried by Bursa Malaysia twice, with the latest being last Tuesday. In reply to the query, the company said it was unaware of the reason for the unusual market activity.

Investors were undeterred by the query, with the stock climbing further to an all-time high of RM4.57 last Friday. Note that the counter was one of the best performing last year, with a gain of more than 4,000%.  

SPA Furniture — held by managing director Datuk Seri Steven Lim Teck Boon and his father Datuk Lim Chaw Teng — is now sitting on a whopping paper gain from its investment in Euro Holdings.

In an interview with The Edge last Thursday, Teck Boon notes that the share price rally could be due to the rumour that SPA Group could possibly inject its automotive parts business into Euro Holdings. SPA Group is principally involved in the automotive parts and food and beverage businesses. “This is what investors have been discussing, but we don’t have such a plan,” he says.

Teck Boon, who personally holds a 7.98% stake in Euro Holdings, assures that no share sales were undertaken by the major shareholder despite the soaring stock price. Shares in Euro Holdings are tightly held by SPA Furniture, which ended up with 63.55% equity interest following a mandatory general offer for the shares it did not own in the company last year.

So, was the stock price being pushed up by institutional funds? He says this has not come to his knowledge, citing the public shareholding spread dominated by individual investors.

Anyway, the pressing question is whether the current lofty valuation is justified considering that Euro Holdings had been loss-making from FY2017 to FY2019 ended Dec 31? Can its earnings grow in tandem with its share price?

After the new management took over in May, the company managed to return to the black in 3QFY2020 ended Sept 30 after making a net profit of RM3.41 million, compared with a net loss of RM3.16 million in the previous corresponding period. However, it was still in the red for 9MFY2020, with a net loss of RM4.09 million due to the pandemic.

“The reason why we invested was the potential we saw in Euro Holdings, as well as the similarities between our auto parts and office furniture segments, whereby both are steel-related products,” says Teck Boon.

He has more than 20 years of experience in the manufacturing and supply of steel-related products, mainly to the automotive and construction industries. His sister Datuk Kenix Lim Sze Way is deputy managing director at Euro Holdings. Prior to joining the company, she worked at a few financial institutions.

Euro Holdings is expected to see full-year profitability starting from FY2021. As at end-September 2020, it had RM33.4 million in gross borrowings, with a gearing ratio of 0.39 times.

At this juncture, Euro Holdings does not intend to raise fresh capital as its priority is to restore public confidence in the company by improving its financial performance, says Teck Boon. “This will be done through a cost management exercise. And we will do more bulk purchases to reduce the cost of raw materials and lower the discount structure for customers.”

Operationally, the lead time for product deliveries has been extended to one month from one to two weeks previously, thanks to a surge in orders, he adds. This is mainly due to the trade diversion as a result of the US-China trade disputes as well as the work-from-home policy because of the pandemic. “Not only do we serve corporate clients, but we also have customers who want to create their own office at home,” he says.

Euro Holdings, which used to operate in the premium segment with key clients such as government-linked companies, is set to kick off its mid-range segment in the next six months, served by its new manufacturing plant that sits on a 15-acre tract in Melaka. “We are in talks with a few OEMs (original equipment manufacturers) abroad for mass production,” says Teck Boon.

The company has three plants in Rawang, Selangor. Malaysia and the rest of Southeast Asia are its major revenue contributors with 40% each. It strives to maintain a net profit margin of 25% to 30%, with a minimum target of 20%. Having said that, rising material prices are a key challenge for the company as steel prices have been on the increase recently.

In its property segment, Damai Vista in Cheras — its only project currently, with a gross development value of RM183 million — is slated to deliver vacant possession by the first half of this year. The project was launched by the previous management and the take-up rate currently stands at about 70%.

Going forward, the company will not exit the property sector but focus on the industrial and commercial segments instead, which have seen better demand than residential properties, says Teck Boon. “We could either build and sell, or build and rent out, the industrial and commercial properties.”

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