Poh Huat (1)

Beneficiary of Weak Oil Price

Publish date: Sun, 14 Dec 2014, 08:01 PM 

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Executive Summary

(1) Furniture exporter with approximately 90% sale to US.

(2) PER of 6.8 times based on historical EPS of 19 sen. 

(3) Weakening of Ringgit from RM3.12 to RM3.50 per USD could propel EPS to 48 sen ? 

(4) Paid out 8 sen dividend in 2014, equivalent to dividend yield of 6.2%

(5) October quarterly result will be released soon. Traditionally strongest quarter due to year end festive season sales.

1. Introduction

Poh Huat is a furniture manufacturer with factories in Johor and Vietnam. Almost all its products are exported to US.

Based on latest closing price of RM1.30 and shares outstanding of 113 mil, market cap is RM147 mil.

Based on historical net profit of RM22 mil, PER is approximately 6.8 times.

Based on net assets of RM164 mil, PBR is approximately 0.9 times.

Healthy balance sheet with small net cash (RM47 mil loans backed by RM51 mil cash).

2. Hsitorical Profitability

					FY2013				YTD
(RM mil)	Jan 13	Apr 13	July 13	Oct 13	Total	Jan 14	Apr 14	July 14	Total
Revenue	95.0	70.8	90.9	101.3	358.0	95.5	84.4	89.1	269.0
> Malaysia	39.1	28.2	29.2	31.1	127.6	33.4	35.7	34.7	103.8
> Vietnam	54.3	40.9	60.1	68.9	224.2	60.9	47.4	53.7	162.0
> others	1.6	1.6	1.7	1.3	6.2	1.2	1.2	0.8	3.3
PBT	6.2	0.6	2.6	10.1	19.5	7.1	3.4	4.4	14.9
> Malaysia	(0.4)	(2.2)	0.3	n/a	n/a	1.5	1.4	1.5	4.4
> Vietnam	6.9	3.2	8.3	n/a	n/a	5.3	3.1	3.6	11.9
> others	(0.2)	(0.3)	(6.75) ^	n/a	n/a	0.3	(1.1)	(0.7)	(1.5)
Net profit	4.8	0.2	1.3	10.3	16.6	6.3	2.5	3.8	12.5
EPS (sen)	4.2	0.2	1.1	9.1	14.6	5.5	2.2	3.3	11.0
USD : RM	3.053	3.085	3.117	3.233	3.122	3.250	3.282	3.210	3.247

^ bad debt related to Poh Huat Qingdao, a small subsidiary which has since been disposed of 

(a) Reported net profit of RM16.6 mil in FY2013. However, there was a bad debt ofRM6.75 million. Excluding that exceptional item, net profit would be RM22 mil.

(b) Reported net profit of RM12.5 mil for 9 months ended July 2014. However, the July 2014 quarterly result was adversely affected by riot in Vietnam. In the July quarter for FY2013, Vietnam division reported PBT of RM8.3 mil. Due to the riot, July 2014 quarter Vietnam PBT was only RM3.6 mil.

If we assume that the July 2014 Vietnam PBT is same as FY2013, YTD nine months net profit would be RM16 mil (instead of RM12.5 mil). Based on assumption that the coming October 2014 quarter also reported net profit of RM10.3 mil (same as Oct 2013 result), FY2014 net profit would be RM26.3 mil. Prospective PER based on sustainable earnings would be approximately 5 times.

(c) For FY2013, average RM : USD exchange rate is RM3.122.

For 9 months ended Oct 2014, average exchange rate is RM3.247.

As at to-date, exchange rate is RM3.495.

3. Dividend Yield of 6.2%

In calender year 2014, the Company has so far declared 8 sen dividend (2 sen yet to go ex). 

Based on share price of RM1.30, dividend yield is 6.2%.

Date of
announcement	Details	amount	Ex date
31 Oct 2014	Second interim	2 sen	6 Jan 2015
10 Sept 2014	First interim	3 sen	8 Oct 2014
1 April 2014	Final	3 sen	7 May 2014
Total		8 sen
28 Nov 2013	Special	2 sen	11Dec 2013
3 April 2013	First and final	2 sen	7 May 2013
Total		4 sen

(source : Bursa website)

4. Net Profit Sensitivity Analysis

With its revenue denominated in USD, every single sen increase in revenue due to Ringgit devaluation will flow directly to net profit after deducting 25% tax (assuming that this is the effective tax rate).

Based on simplistic financial modelling, the group's net profit will increase as follows when the Ringgit weaken :-

FY2013	RM:USD	RM:USD	RM:USD	RM:USD
	3.12	3.30	3.50	3.70
Revenue	358.0	378.7	401.6	424.6
Net profit	21.6	37.1	54.3 #	71.6
EPS (sen)	19.2	32.9	48.1	63.3
PER (x)	6.8	4.0	2.7	2.1

# To understand how I arrived at the figures, let's take RM : USD 3.5 as example :-

(1) FY2013 revenue of RM358 mil was arrived at based on USD : RM of 3.12

(2) If Ringgit depreciates to 3.5, revenue will be RM358 mil x 3.5 / 3.12 = RM401.6 mil

(3) the surplus of RM43.6 mil will flow directly to pretax profit

(4) After deducting 25% tax, net gain will be RM32.7 mil

(5) Net profit will be RM21.6 mil + RM32.7 mil = RM54.3 mil

5. Concluding Remarks

(1) I am not the first one to suggest that weak Ringgit will benefit exporters. For example, The Edge Financial Daily has recently proposed buying into Homeritz exactly for that purpose. However, I had gone one step further to try to quantify the benefit through financial simulation.

(2) Before you jump into the market to buy up Poh Huat big time, let me qualify that if you ask me whether I really believe that Poh Huat will increase its net profit next year by 150% to RM54.3 mil, my answer is "Probably not...". 

My reasoning is very simple. In life, you will seldom be rewarded so handsomely without trying real hard. 

Unless Poh Huat has already locked in next year revenue in USD through contractual arrangement (which I doubt so), I would expect the American purchasers to demand downward revision of USD pricing once they get wind of the windfall gain arising from the Ringgit devaluation.

Having said so, I don't think they will be so unreasonable as to wipe off the entire gain (afterall, are they going to compensate Poh Huat in the opposite case of Ringgit strengthening ? I don't think so).   

I believe there will be actual substantial translation gain in the event that the average USD : RM exchange rate next year is 3.5. For example, a 50% increase in net profit is not inconceivable.

(3) Apart from weaker Ringgit, the collapse of oil price has put more money into Americans' pockets. With more spending power, demand for furniture will also go up (hey, let's change our sofa now that we are saving so much money from lower fuel price). That is why the title of this article is "Beneficiary of Weak Oil Price" instead of just "Beneficiary of Weak Ringgit".

(4) If you are thinking of buying into Poh Huat after reading this article, please be warned that in a market meltdown like in 1997, all share price will collapse no matter how profitable a company is. The market will simply go insane.

So please be careful with your money. Think hard before you jump in.

Have a nice evening.