This article first appeared in The Edge Financial Daily on September 13, 2019

Poh Huat Resources Holdings Bhd
(Sept 12, RM1.46)
Maintain buy with an unchanged target price (TP) of RM1.88: For the first half of financial year 2019 (1HFY19), Poh Huat Resources Holdings Bhd managed to record a healthy year-on-year (y-o-y) revenue growth of 19.7% to RM344.1 million. The higher shipment of furniture was mainly driven by new product range focusing on affordable range of household furniture, and additional orders from the US after it imposed hefty tariff on Chinese-made furniture. Based on Malaysian furniture export data, overall furniture exports increased by 9.8% y-o-y to RM4.1 billion, and exports to the US surged 20.8% y-o-y to RM1.6 billion in the five months of 2019.

According to the Malaysian Furniture Council, Malaysian furniture exports to the US are expected to grow at least 20% annually over the next three years, backed by higher sales of completed products amid the ongoing US-China trade war. Given that more than 90% of Poh Huat’s revenue is derived from North America, we believe the group will continue to register healthy top-line growth, underpinned by the shift in preference to more affordable range of household furniture in the US market, as well as trade diversions from China.

Since the start of the US-China trade war, Poh Huat’s management has noticed a large number of Chinese manufacturers shifting their manufacturing bases to Vietnam, resulting in manufacturers there facing labour shortages and rising wages across various sectors. Currently, Poh Huat’s Vietnam operation is suffering from margin erosion due to the shift in product mix to affordable ranges, as well as higher raw material and labour costs. As at the second quarter of the financialFY19 (2QFY19), the company’s pre-profit margin for its Vietnam operation contracted by 3.3 percentage points (ppts) y-o-y and 5.7% ppts quarter-on-quarter. In the short term, we foresee the group’s Vietnam operation to remain challenging.

Although Poh Huat has yet to fix a dividend policy, we expect the group to distribute at least 40% of its annual profit after tax for FY19. The group has been in a net cash position since FY14 with a net cash of RM76 million as of 2QFY19. Assuming a dividend payout ratio of 40% for both FY19 and FY20, and 45% for FY21, this translates into dividend payouts of eight sen, eight sen and nine sen a share, or dividend yields of 5.5%, 5.5% and 6.2% for FY19, FY20 and FY21, respectively.

We maintain our FY19 to FY21 earnings forecasts, and TP of RM1.88 based on an unchanged 10 times calendar year 2020 earnings per share. — TA Securities, Sept 12