Friday 29 Mar 2024
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WITH the US market contributing approximately 93% of revenue in its financial year ended June 30, 2014 (FY2014), the weakening of the ringgit is a boon for furniture maker Latitude Tree Holdings Bhd as it stands to book in higher foreign exchange gains.  

Latitude Tree managing director Joseph Lin tells The Edge that every 1% increase in the US dollar against the ringgit translates into an additional RM150,000 to its turnover and RM15,000 to its profit before tax.

“We are expecting the stronger US dollar to boost our profit next year. Also, with high demand from the US now, we are looking forward to that as a driver for our sales,” he says.

Given Malaysia’s dependence on oil revenue, the ringgit has fallen 10.9% to 3.4892 against the greenback — the lowest since 2009 — over the past four months as crude oil prices fell to five-year lows.

According to Taiwanese-born Lin, Latitude Tree’s products cater for the middle to middle-high income households. With the US seeing a resurgence in home purchases, he expects demand for the group’s wooden furniture to be well supported.

“Our factories are running at nearly full capacity. We are also allocating US$8 million to US$10 million for an upstream plant in Vietnam so that we will have more consistent supply of timber,” he says.

Latitude Tree was founded by Lin’s father, the late Lin Tzu-Keng, in 1988. Currently, it has operations in three countries, namely Malaysia, Thailand and Vietnam. Its Malaysian and Thai operations mainly produce solid rubber-wood dining set furniture, while its Vietnam plants make bedroom sets from various wood materials.

Latitude Tree has been a beneficiary of a weaker ringgit since the currency began to descend from a high of 2.9625 against the greenback on May 8, 2013. In FY2014, the company’s net profit rose 125.79% to RM55.02 million or 56.6 sen a share — the highest since it was listed in 1997 — while revenue grew 31.87% to RM651.03 million.

latitude_treeIn FY2013, Latitude Tree posted a net profit of RM24.37 million or 25.07 sen per share. This was nearly triple the RM9.84 million profit it made in FY2012, the year it was hit by economic woes in the US.

Interest in Latitude Tree’s shares has been rising since the ringgit started sliding last year. The stock has nearly tripled in just over a year to close at RM3.61 last Thursday for a market capitalisation of RM350.9 million, after reaching an all-time high closing of RM3.93 on Oct 1.

Even with the rapid rise in its share price, Latitude Tree is trading at 5.3 times its annualised earnings per share. Based on FY2014’s earnings per share of 56.6 sen, it is trading at a historical price-earnings ratio of 6.38 times. This is lower than the market’s valuation for its peers, namely SYF Resources Bhd (10.57 times), Poh Huat Resources Bhd (8.3 times) and SWS Capital Bhd (40 times).

In its first quarter ended Sept 30, 2014 (1QFY2015), Latitude Tree registered a 14% increase in its net profit to RM16.65 million compared with the previous corresponding period. However, a stronger ringgit in the quarter pulled its revenue down by 0.75% to RM175.74 million.

The quarter also saw a margin reduction to 14.92%, compared with 16.9% previously.

Lin, however, expects the substantial drop in crude oil prices to result in across-the-board reduction in raw material prices. Although he thinks Latitude Tree’s clients will bargain for lower prices “because they know we are making more profit [from the stronger US dollar and lower crude oil prices]”, he says the stronger demand will allow the company to maintain more favourable prices.

Reuters reported that while sales of single-family homes in the US rose for the third straight month in October to a seasonally adjusted annual rate of 458,000 units, the previous month’s sales were revised downwards to 455,000 units from 467,000. This could indicate that the housing market recovery would be gradual.

Latitude Tree has also seen its debts decrease, which will result in lower interest charges. As at 1QFY2015, its total borrowings were 6.45% lower year on year at RM81.13 million. Its finance cost of RM684,000 in the quarter was also 30.28% lower than the previous year.

As at Sept 30, the company had net cash of RM50.07 million, equivalent to 52 sen per share.

However, Lin warns that Latitude Tree’s business is cyclical in nature and usually sees slower sales between January and March. “Wholesalers (clients) build up their inventories between July and December, so our first two quarters are the usual strong ones,” he says.

Latitude Tree has a free float of 53.16% as at Oct 31, 2014. It saw an average daily trading volume of 457,000 shares over the last year. While it has been increasing its dividends in tandem with a growing bottom line, Latitude Tree has a yield of 2.35%, based on FY2014’s dividend of 8.5 sen per share.

Even if the company increases its dividends by another 2.2 sen per share (the same quantum of increase in FY2014) this year, this will translate into a yield of only 2.96%.

The stock was featured as an Insider Asia stock pick on Oct 30.

 

This article first appeared in The Edge Malaysia Weekly, on December 15 - 21, 2014.

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