Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on May 25, 2020 - May 31, 2020

THE Covid-19 pandemic that has brought global economic activity almost to a standstill has affected many export-oriented industries in Malaysia. The furniture-making industry is one.

Since the start of the year until mid-March, the share prices of furniture makers have been on a downward trend as the pandemic made its way across the globe. Many furniture makers saw their share price plunge to five-year lows during that time.

This has turned valuations highly appealing for some furniture makers listed on Bursa Malaysia, raising the question: Is now a good time to start accumulating furniture stocks, which have been trending upwards again?

Will demand for furniture recover soon, however, to boost the incomes of Bursa-listed furniture makers?

According to Khoo Yeow Chong, president of the Malaysian Furniture Council (MFC), furniture makers are expecting a V-shaped recovery in demand for their products.

In a response to a question from The Edge on how long it would take for demand for furniture to recover post-global lockdowns, Khoo says 42.9% of the industry expects recovery in the first half of 2021, but this will come after a painful 2020.

“The MFC conducted a study earlier this month and the industry is projecting losing slightly more money in 2H2020 than in 1H2020, owing to uncertain global prospects,” he says.

Between 58% and 62% of Malaysian-made furniture are sold internationally, with the US being the largest international market, comprising 42% of Malaysia’s furniture export demands. MFC data shows sales to the US totalled RM4.68 billion last year.

Other major export markets for Malaysian-made furniture are Japan, which comprises 7.3% of exports, followed by Singapore (7%), Australia (5.3%), the UK (4.9%), India (3.4%), Canada (2.9%), the Philippines (2.6%), China (2.4%) and Saudi Arabia (1.8%).

In 1Q2020, exports to Japan, Singapore, Australia and the UK dropped year-on-year, according to MFC. During the quarter, however, exports to the US, India and Saudi Arabia were higher by RM628.7 million y-o-y.

Nevertheless, should cases of Covid-19 continue to be suppressed globally, a V-shaped recovery is expected in 2020 itself, says Khoo. “This optimism shows the furniture industry is resilient and will recover more quickly than other sectors.”

Among the Bursa-listed furniture makers that have attractive valuations is Poh Huat Resources Holdings Bhd. As at May 20, Poh Huat was trading at five times trailing 12-month (TTM) earnings, which gives a dividend yield of 7.75%.

Granted, the Johor-based furniture maker has yet to report a quarter in which its operations were affected by the Covid-19 pandemic and the subsequent global economic shutdowns. Its latest quarterly result was for the first quarter ended Jan 31, 2020 (1QFY2020), which was before the pandemic.

It is worth noting, however, that as at Jan 31, 2020, Poh Huat’s cash and bank balances stood at RM127.85 million, slightly lower than the RM133.08 million it had in the corresponding year-earlier quarter.

Its short-term borrowings amounted to RM17.9 million, with zero long-term borrowings as at Jan 31, 2020. This means the group is sitting on a net cash balance of RM109.95 million.

With total issued shares of 231.1 million units, Poh Huat has net cash per share of 47.6 sen. This means almost half of its share price of RM1 as at May 21 is made up of net cash.

When contacted, a company representative declined to comment on prospects of the group and its strategy to keep itself afloat during this trying time.

In the notes accompanying its 1Q2020 financial results, however, Poh Huat stated that, as the repercussions of the pandemic are still unfolding, the group is unable to predict its full impact on the global furniture trade.

“We are preparing ourselves for the worst-case scenario of a significant drop in demand, supply disruption of materials routed from logistical hubs in impacted areas as well as labour issues due to quarantine procedures or illness,” the group stated.

This cautious outlook could stem from the fact that more than 90% of Poh Huat’s revenue is generated from North America.

While the company is being very cautious in projecting its future performance, the MFC is more optimistic about the furniture industry’s future. It says because of the Movement Control Order, many people upgraded their home furniture because of an increase in usage.

“Moreover, there has been a shift in consumption of office furniture, with the onset of Covid-19 and social distancing. Office chairs have seen an increase in sales, owing to the new culture of working from home,” says MFC’s Khoo.

There are only two research houses that cover Poh Huat. On March 30, TA Securities assigned a target price of RM1.11 on the stock with a “buy” call; Affin Hwang Investment gave it a “sell” rating, with a target price of 62 sen.

TA Securities likes the company for its healthy balance sheet and decent dividend yield. “We believe Poh Huat’s healthy balance sheet will help the group sail through the negative headwinds.”

Besides Poh Huat, other furniture makers with attractive valuations and strong fundamentals include Lii Hen Industries Bhd, which is trading at 5.26 times TTM price-to-earnings ratio and offers a dividend yield of 8.08%, and JayCorp Bhd (5.7 times TTM PER, 8.75% dividend yield).

Asked whether the industry requires government assistance in these unprecedented times, Khoo says the industry is hopeful that the government will champion the buying and sourcing of local furniture.

“After all, the Malaysian furniture industry is ranked the world’s 11th largest exporter in the world, behind countries such as China, Germany, Vietnam, Poland, the US and Italy,” he says.

 

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