Wegmans aims to boost exports after doubling capacity

This article first appeared in The Edge Financial Daily, on February 14, 2018.

Law (left) and Wegmans managing director Keh Wee Kiet at the press conference after the company’s IPO prospectus launch. Photo by Suhaimi Yusuf

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KUALA LUMPUR: Wegmans Holdings Bhd, a furniture maker that is set to list on the ACE Market of Bursa Malaysia on March 6, expects to see an increase in revenue once it has doubled its production capacity in the fourth quarter of 2019 (4Q19).

The Muar-based group aims to raise RM29 million from its initial public offering (IPO), and plans to use RM11 million or 38% of the amount for capital expenditure, including the construction of new factories for manufacturing production.

The completion of Wegmans’ new plant, slated for 4Q19, is projected to increase the group’s annual production capacity to 960,000 units of chairs and 380,000 units of tables for the dining room, living room and bedroom, according to the IPO prospectus.

Wegmans aims to start exporting its products to more European countries besides expanding its presence in existing markets following the increase in its capacity, said the group’s executive director Collin Law at the launch of the group’s prospectus yesterday.

“We will source suitable sales agents to market our home furniture products by 1Q19 in European countries,” the group said in its prospectus.

In 3Q17, 99% of the group’s revenue was derived from exports to mainly Japan, the US, Australia and the UK, in addition to 10 other countries in which Wegmans has a presence.

The group will also use RM11 million of its listing proceeds for the purchase of new machineries and equipment, according to the prospectus.

Meanwhile, RM3.5 million will be used for working capital and the remaining RM3.5 million for listing expenses.

At an initial price of 29 sen per share, Wegmans will be trading at 9.42 times its earnings for the nine months ended Sept 30, 2017, which saw the group record an annualised net earnings per share of 3.08 sen.

The group recorded a compound annual growth rate of 47.4% for revenue and 126.5% for profit between the financial year ended Dec 31, 2014 (FY14) and FY16.

Asked why Wegmans was listing at a higher price-earnings ratio than some of its peers, such as Poh Huat Resources Holdings Bhd and Lii Hen Industries Bhd, Law said the offer price reflected the quality of the group’s products.

“I would like to stress that the quality, design and development of our products would be the key factors in determining the profit of the company,” he said.

While a strengthening ringgit against the US dollar will impact Wegmans’ top line negatively, Law said the group would keep a close eye on the exchange rate and adjust prices in order to maintain profit levels.

In FY16, a 5% decrease in the US dollar-ringgit exchange rate would have led to a 15.63% decline in gross profit to RM21.72 million from RM25.74 million, Wegmans said in its prospectus.

“For FY16, approximately 98.42% of revenue and 9.53% of purchases were denominated in US dollars,” Wegmans said. The remaining sales and purchases were recorded in ringgit.

An 84.22% foreign composition of its workforce may also squeeze Wegmans’ margins going forward as it had to pay the new levy for foreign workers since Jan 1.

However, the price adjustments and the continuous launch of new designs are expected to help the group maintain positive profit margins in the years to come, Law said.

The group in 2016 purchased four parcels of vacant contiguous land in Muar, which is targeted to be developed in three phases.

The first phase will include the building of a workers’ hostel and a management office with showrooms, and production is expected to start as well.

Meanwhile, the second and third phases are expected to see the construction of an additional three factories in total for manufacturing production.

“It is expected that our new factories for manufacturing production and its accompanying new management office, new showrooms and workers’ hostel will be fully operational by 2Q20,” said Law.