This article first appeared in The Edge Financial Daily, on January 5, 2016.

Poh Huat Resources Holdings Bhd 
(Jan 4, RM2)
Maintain buy with a higher target price (TP) of RM2.39: Excluding RM5.2 million of exceptional losses  arising from the fire incident at its Vietnamese plant in August 2015, the financial year ended Oct 31, 2015 (FY15) core net profit of RM44.4 million came in above our expectations, accounting for 109.2% of our full-year estimate. The variance was mainly due to higher-than-expected sales. 

Poh Huat Resources Holdings Bhd has declared a final dividend of two sen per share (fourth quarter of FY14: 1.5 sen per share), bringing FY15 dividend payout to five sen per share (FY14: four sen per share). (Dividends adjusted for a one-into-two share split completed in October 2015.) 

Earlier, the group declared a first interim dividend of two sen per share for FY16, which will go ex tomorrow and will be paid on Jan 22, an early “ang pow” for entitled shareholders. This is the first time the group has declared a first interim dividend in the first quarter of a financial year.  

Year-on-year, FY15 core net profit surged 86.4% to RM44.4 million, mainly due to higher revenue (+20.4%) and better margins as a result of operational improvement at its Malaysian plant and a stronger US dollar against the ringgit.  

Quarter-on-quarter, core net profit jumped 97.9% mainly due to seasonality, higher orders and better margins recorded by its Malaysian operation. 

We raise our FY16 and FY17 ringgit/US dollar foreign-exchange assumption from 4 to 4.3, in line with our in-house forecasts, and raise FY16 and FY17 earnings forecasts by 4.9% and 5% respectively. 

The US housing starts, which are considered to be a bellwether of the group’s furniture export to the United States, continued to gain strength since hitting the bottom in early 2011. We expect Poh Huat’s earnings prospects to remain promising in the foreseeable future.

After the fire incident at its Vietnamese plant, the group replaced the damaged machinery with more advanced machinery. This was intended to increase the level of automation, to reduce dependence on labour and to improve the plant’s operation efficiency.

We raise the target multiple for Poh Huat from 10 times to 12 times, given the positive business outlook in the US market and improved share trading liquidity with the average daily share trading volume having more than tripled from 305,300, when we initiated coverage of the company in January 2015, to about 1.05 million currently.

The group is more investor-friendly by increasing dividend payouts and paying dividends on a more regular basis, from one dividend payment a year in FY12 to three dividend payments in FY15. Its market capitalisation has crossed above US$100 million (RM434 million), and is likely to appear on the radar of more international small-cap funds. Together with earnings upgrades, we raise Poh Huat’s TP from RM1.91 to RM2.39, based on revised 12 times calendar year 2016 earnings per share. — TA Securities, Jan 4