Between the Lines: By C.S. TAN

Investors have turned away from furniture stocks in the view that companies in this industry are no longer competitive in the country. A handful of companies have restructured their operations such that their latest results show an unnoticed but marked improvement. 

THE furniture industry is usually hailed by its leaders as a sizeable one, with exports of an estimated RM8.5bil last year.  


The perception is very different in the stock market where investors view it as a fragmented industry of small manufacturers that are struggling to survive. 

The industry is seen as labour intensive, offering low profit margins, if any, and facing the heat of competition from lower cost countries such as China and Vietnam.  

This image is very much formed from the results of Latitude Tree Holdings Bhd which reported a pre-tax loss of RM790,000 in its latest quarter.  

One of the biggest companies in the industry, Latitude Tree is listed on the main board and is probably the only one researched by analysts.  

The company incurred pre-tax losses of RM1.9mil in its operations in Malaysia and RM2.2mil in Thailand but a pre-tax profit of RM3.3mil in Vietnam in that quarter. 

Latitude Tree is expanding its operations in Vietnam and that could bring back ample profits for the group.  

The geographical contrast in its results seems to confirm concerns that the manufacture of furniture could be profitable in Vietnam, but not in Malaysia.  

That perception was reinforced by the recent results of Poh Huat Resources Holdings Bhd which reported a pre-tax profit of RM6.5mil from its plant in Vietnam, almost three times the RM2.2mil earned from its plants in Malaysia in its latest quarter.  

Overall, Poh Huat’s results were excellent – a net profit of RM17.1mil and earnings per share of 19.6 sen for its financial year ended Oct 31, 2014.  

It is also emblematic of the industry in which some companies have managed to thrive by re-location or a revamp of their operations.  

Furniture makers that have improved their profitability include Jaycorp Bhd, DPS Resources Bhd, Euro Holdings Bhd and Eurospan Holdings Bhd.  

Their shares are, however, shunned, except for Poh Huat, which rose by over 50% to 94.5 sen on Friday from about 60 sen in November. Even so, it is valued at a price/earnings ratio (PE) of 4.9 times its earnings last year.  

The perception persists that furniture manufacturers would not be able to sustain their profitability as they meet the pressure of costs, competition and currency.  

Hence, they are all valued at single-digit PEs. Valuations do change, and investors who take the effort to research and identify the companies that would continue to prosper are likely to be well rewarded.  

 

A fair effort 

 

The results of Top Glove Corp Bhd last week drew a mixed response from analysts. Being the country’s biggest glove manufacturer, its results were, of course, closely watched.  

The company showed a 19% growth in a net profit of RM29.8mil for its first quarter (Q1) ended Nov 30, 2014.  

That was close to the RM31mil it needs to earn each quarter to meet its targeted net profit of RM125mil in its current financial year. The target represents a growth rate of 21% over the previous year.  

Top Glove would have to make up the slight quarterly shortfall in subsequent quarters. 

Investors, however, were accustomed to much higher rates of growth from Top Glove, and their disappointment led to a sharp de-rating in its share price in recent months. 

The turnaround of the group’s operations in China stood out in its latest results. It managed to produce an operating profit of RM130,000 in China in Q1 compared with a loss of RM4.4mil in the preceding quarter.  

That difference accounted for most of the group’s 19% growth in Q1 as the performance in its Malaysian operations were flattish.  

While investors had bid the share price of Top Glove at various volatile levels, its management has been consistently excellent.  

The company made a net profit of over RM100mil last year, a feat that few former second board companies have managed to execute, and it is set to do so again this year.  

It remains the industry standard for the other glove manufacturers to reach out for.  

Dividends make the difference 

 

Telekom Malaysia Bhd’s share price reached a three-year high of RM12.10, up 60 sen, on Friday. That was a day after it announced that investors who still hold its shares at the end of Jan 15 would be entitled to its special gross dividend of 65 sen a share.  

This highlighted the interest that investors have in dividend yield, particularly at this time of heightened uncertainties in global economies and markets. In dividend payouts, Bursa, the company, has set a good example.  

Plantation companies are also pulling in huge sums of cash at this time. Those that are debt-free will have loads of cash while those with bank borrowings will soon be able to fully pay that off.  

They would be in tune with the times if they also pay out special dividends. Some have started to do so.  

Some small and mid-cap companies are also paying their owners higher dividends, which is an encouraging trend. In the small-cap companies where their share prices were beaten down due to bearish global sentiment, the yield in many cases has risen to 9%, which is very high. The yield is expected to be sustained as long as economic growth does not suddenly vanish.  

Share prices of small-cap companies do not respond to dividend yield at this time due to market sentiment. But, eventually, value in corporate profits and yield will converge with the share price. It’s just a matter of time. 

 
LATITUD :  [Stock Watch]  [News] 
POHUAT :  [Stock Watch]  [News] 
JAYCORP :  [Stock Watch]  [News] 
DPS :  [Stock Watch]  [News] 
EURO :  [Stock Watch]  [News] 
EUROSP :  [Stock Watch]  [News] 
TOPGLOV :  [Stock Watch]  [News] 
TM :  [Stock Watch]  [News]