POH HUAT Resources Holdings Bhd (fundamental: 2.4; valuation 2.1) is optimistic about its prospects, thanks to the improvement in the US economy, which accounts for 65% of its total sales.

“We are targeting 20% revenue growth in the next three years, which is an average of about 7% a year,” co-founder and group CEO Tay Kim Huat tells The Edge, speaking in Mandarin. “With the US economy picking up, we will continue to expand in the next few years.”

In its financial year ended Oct 31, 2014 (FY2014), Poh Huat’s net profit rose 41.9% to RM23.8 million from a year ago. Revenue increased 5.4% to RM377.17 million.

Citing a Furniture Today report that said the US saw a 9% year-on-year (y-o-y) rise in furniture imports in 2012 to US$17 billion, driven by higher exports from China (+8%) and Vietnam (+24%), Tay observes, “The US furniture market is huge with [still] a lot of opportunities for us. It all depends on how we grab a slice of it.”

Original equipment manufacturer business accounts for 90% of Poh Huat’s exports to the US, where the group has had a presence for almost 20 years.

Also, as the US market recovers, Tay sees customers wanting to lock in longer-term contracts with Poh Huat again.

The Muar-based furniture maker has, over the last three years, invested over

RM15 million in new machinery to improve the efficiency of its five factories in Malaysia and two in Vietnam. This is expected to lead to pre-tax margin expanding from a single digit to 12% over the next few years.

The current production capacity of the operations in both the countries is about 75%.

“We will continue to spend about RM5 million a year over the next five years. That will see our capacity increase 20% overall,” says Tay, who holds a 24.03% stake in the group.

Poh Huat’s Vietnam and Malaysian operations produce different products catering for different markets. The former manufactures only home furniture bound for the US market while the latter makes office furniture, more than half of which is sold to Canada.

The group also has a 51% stake in a distribution centre in South Africa, but this is merely to maintain a presence there.

Chief financial officer Lee Ing Tiong says Poh Huat’s Malaysian factories used to manufacture home furniture as well but the margins were often subsidised by office furniture sales. “Thanks to rationalisation efforts, profit before tax (PBT) margins in Malaysia improved from -1.08% in FY2013 to 5.13% in FY2014,” he remarks.

“We have also reduced our manpower, especially in Malaysia, as manufacturing office furniture is not as labour-intensive as producing home furniture [in Vietnam]. By using higher-grade machinery, labour usage and costs are reduced.”

In FY2014, Poh Huat reduced its headcount in Malaysia to 965, down 35% from FY2012. In Vietnam, it was only a 6.7% drop to 4,370. Nonetheless, Lee notes that the group will maintain its workforce at these levels as it is looking to add to production capacity.

The group has also shut down its factory in China, which continued to suffer operating losses, mainly due to impairment charges.

Overall, group PBT margin rose from 4.31% in FY2012 to 7.49% in FY2014.

The bulk of the margin expansion is expected to come from the Malaysian operations because the PBT margins of the Vietnam operations have traditionally been higher (9.5% in FY2014) due to their lower cost structure.

“Our decision to set up a factory in Vietnam in 2001, just when the country was opening up, proved to be a good move,” Tay says, although he admits that among the challenges the group faces now is rising inflation and increasing labour costs in the country. However, average labour cost is still about 78% lower per head than in Malaysia.

In the domestic market, Poh Huat’s furniture range is marketed under AT Office Systems and AT Home Systems.

While the group is benefitting, and will continue to benefit, from the strengthening of the US dollar, Lee cautions that it may not be sustainable. Plus, US customers may ask for discounts to adjust to changes in the foreign exchange rate. 

Nevertheless, Poh Huat’s inputs are mainly sourced locally, with imports in US dollars accounting for only 8% to 10% in its Malaysian operations and about 20% in Vietnam.

The prices of boards or wood, the main material used for both home and office furniture, have been stable, Lee adds.

In July 2013, Poh Huat and another party acquired five plots of agricultural land of a combined 3.26ha in Muar and Poh Huat earmarked its portion for the development of terraced shopoffices.

“We are doing the conversion [to commercial land] now, which will take at least two years. Once that’s done, we will decide if we want to develop or sell,” Tay explains.

According to its latest annual report, Poh Huat’s 19ha in Dong Nai and Binh Duong, Vietnam, were only carried at an average of RM14.50 psf as at Oct 30, 2013, but they are now believed to be worth more.

Tay says the group is in the midst of building another factory on a 1ha plot just behind its old factories. “It will be completed in June and we are opting to either rent it out or use it as standby if we need to ‘up’ our capacity as and when business gets better.”

As at Oct 31, 2014, Poh Huat had net cash of RM18.1 million, after deducting total borrowings of RM34.78 million.

Poh Huat has been rewarding its shareholders, declaring an eight sen dividend per share in FY2014 compared with two sen in FY2012 and five sen in FY2013. Though it does not have a dividend policy, the company pays out 30% to 40% of its profits.

On whether the payout will be increased, Tay says: “We will review it every quarter but if the company makes more profit, we don’t discount paying out more.”

Based on its closing price of RM1.87 last Thursday, the dividend of eight sen per share translates into a yield of 4.3%.

This article first appeared in The Edge Malaysia Weekly, on January 26 - February 01 , 2015.

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