Thursday, 5 December 2013

Furniture Stocks Draw Attention

I came to know about Latitude Tree just last week. In the early morning of that day, I still never heard of this stock, but later in that day just before the market closed, I decided to add it into my portfolio.

It is rather impulsive. I saw its share price spiked after a magnificent quarterly financial result.

Latitud is a Malaysia-based furniture manufacturing company founded & controlled by Taiwanese. It started off as a manufacturer of dining chairs in 1988. Now it has grown into a complete medium to high end dining & bedroom sets manufacturer. It also produces living room collection sets and some office furniture.


There are quite a number of furniture manufacturers listed in Bursa Malaysia. I pick 4 of them to do a very simple & superficial comparison. They are:
  • Latitude Tree
  • Homeritz
  • Lii Hen
  • Poh Huat
* The information, figures, calculation & opinion provided below might not be accurate or true. Please do own research if in doubt.

Products

Company Products
Latitude Wooden furniture
Homeritz Upholstered furniture
Lii Hen Wooden furniture
Poh Huat Wooden furniture

Homeritz is different from all 3 others as it designs and manufactures upholstered home furniture such as leather and fabric-based sofas, dining chairs, bed frames etc. It also has its own brand Eritz since 2009.

The other 3 companies design and manufacture wood-based furniture. Both Latitude & Lii Hen concentrate on home furniture but Poh Huat manufactures both home & office furniture.


Market

All 4 companies export majority of their products to overseas which include the Americas, Europe, Middle East, Australasia & South Africa. 

Latitud exports 99% of its products, in which 92% are exported to the United States (FY2013). The rest are to Canada, Europe, Australia, South Affrica & Middle East. I think it still has a lot of room to expand its presence worldwide.

The other 3 companies claim that they export to more than 50 countries worldwide.

Homeritz's major export destination is Europe, which comprises 41% in FY2011. United States is Poh Huat's biggest export country (?%) while export to the Americas (North & South) makes up 77% of Lii Hen's revenue in 2013.


Facilitiy

Latitude has 3 factories in Malaysia, 2 in Vietnam & 1 in Thailand.

Homeritz & Lii Hen both have 5 factories each in Johor.

Poh Huat has 2 factories in Vietnam, while others in Malaysia, China & South Africa.

Latitude might be less affected by the effect of minimum wages and increased electricity tariff in Malaysia, as its mainly concentrates its production in Vietnam, while scaling down its Malaysia operation.


Market Capitalization


Latitude Homeritz Lii Hen Poh Huat
Share price 1.74 0.56 1.64 0.85
M/Cap (mil) 169.1 112.0 98.4 96.4

Latitude has biggest market cap followed by Homeritz.


Financial Performance

RM mil Latitude Homeritz Lii Hen Poh Huat
Revenue 493.7 112.9 346.5 392.0
PAT 24.4 15.1 21.3 15.2
Gross margin% 14.4 16.9@ 15.4 13.4

*Latitude FY2013 (end June13)
*Homeritz FY2013 (end Aug 13)
*LiiHen FY2012 (end Dec12)
*Poh Huat FY2012 (end Oct12)

@ Operating margin

Latitude sells more and earns more compared to others. However, Homeritz has the best gross margin even though its revenue is the lowest.

For latest financial result,

Latitude and Homeritz break previous years' earning record. Lii Hen & Poh Huat's 9MFY13 revenue & PAT are lower YoY but there is a special one-off loss for Poh Huat.


Balance Sheet

RM mil Latitude Homeritz Lii Hen Poh Huat
Total Asset 478.6 103.8 190.4 243.3
Total Liab 179.3 16.5 46.8 94.5
Cash 112.5 34.7 40.4 30.2
Borrowings 91.2 2.7 17.6 33.4





ROE (%) 10.5 20.2 15.9 10.7
D/E ratio Net cash Net cash Net cash 0.02

Almost all are in a net cash position.

Homeritz has the best ROE, while Latitude has the lowest ROE but still not too bad above 10%.


Dividend


Latitude Homeritz Lii Hen Poh Huat
Share price 1.74 0.56 1.64 0.85
Dividend (sen) 6.3 3.0 12.0 2.0
Div Yield % 3.6 5.4 7.3 2.4
Div Payout % 25.0 40.8 33.8 16.0

*Share price at 4th Dec 2013 close
*Base on previous full financial year total dividend

Homeritz & Lii Hen are more generous in their dividend payout. At current share price, Lii Hen has the best dividend yield, followed by Homeritz, Latitude and Poh Huat.


Value


Latitude Homeritz Lii Hen Poh Huat
Share price 1.74 0.56 1.64 0.85
EPS (sen) 25.07 7.56 35.5 14.04
PE 6.9 7.4 4.6 6.1
NTA 2.57 0.41 2.39 1.37
P/B 0.68 1.36 0.69 0.62

*EPS base on last full financial year earning

All 4 stocks have relatively low PE ratio. This shows that the furniture stocks are not popular and perhaps overlooked.

Due to recent spike in share price, Latitude's PE ratio has gone up from 5.3x to 6.9x. Lii Hen has a very low PE but it is anticipated that its upcoming FY2013 profit will be lower. All except Homeritz are trading below their book value.

       Homeritz's dining set

Out of all of these 4 companies, Homeritz stands out with best gross margin, best ROE, best dividend payout ratio, decent dividend yield and its recent financial results are good. That's why it's the "most expensive" one here.

As all 4 companies are export-orientated, I think they will have good time ahead as the US and Europe are slowly coming out from recession. US house sale seems to recover thus there will be more demand for furniture. The expected strengthening of US dollar will also improve exporters' earnings to a certain extent.

For me, I think Latitude is the best bet in furniture manufacturing, mainly because of its future earning prospect and low projected PE.

       Latitude's bedroom set

Latitude's latest FY14Q1 result records a 27% and 62% increase in revenue and net profit YoY, due to higher orders, production and sales, while the USD has strengthened only 3.6% between these two periods. Its FY14Q1 net profit already makes up 60% of FY2013 full year net profit.


RM mil FY14Q1 FY13Q4 FY13Q1
Revenue 177.1 124.4 139.7
PBT 20.7 9.4 12.2
PBT% 11.7 7.6 8.7
PAT 14.6 5.9 9.0




MAS Rev 28.9 23.2 29.2
MAS PBT 1.2 -1.0 0.8
VIET Rev 142.2 96.1 106.3
VIET PBT 20.0 12.0 11.7
THAI Rev 6.0 5.2 4.2
THAI PBT 0.02 -0.5 -0.2


In FY2013, there is an increase in monthly production capacity of a factory in Vietnam by approximately USD1.0mil. I am keen to know what is the utilization rate of its overall production capacity and its future plan of capex.

In early 2013, Latitude has proposed to acquire all the subsidiaries of Latitude Tree International Group Ltd (LTIGL) for SGD48.75mil, which includes 99.99% of share capital of Latitude Tree Vietnam Joint Stock Company. Operation in Vietnam (under LTIGL) contributes 100% of Latitude's profit in FY2013 as operation in both Malaysia & Thailand suffer minor loss.

Currently Latitude Tree holds the shares of Vietnam operation indirectly through 77.6% owned LTIGL. Once the corporate exercise is completed, Latitude Tree will directly own 99.99% of its most profitable Vietnam operation. 

The net profit attributed to non-controlling interest for FY2013 amounted to RM7.68mil, compared to RM24.37 net profit for owners of the parent. If both are combined later, its net profit might be 32% more.

For recent FY14Q1, PBT from Vietnam operation increases as much as 70% both QoQ and YoY to RM20mil. To add icing on top, operation in Malaysia turns profitable in this quarter after scaling down of its operation.

Latitude will only need to pay SGD2.3mil cash for the acquisition, the balance of SGD46.4mil will be settled by way of set-off against the capital due to be returned to Latitude Tree. I actually don't understand what it really means, but it seems like Latitude does not need to borrow or deplete its cash substantially, or do share placement to complete the acquisition.

The proposed acquisition is expected to be completed before 31 Dec 2013.

       Latitude's dining set

As Latitud's business is moderately affected by seasonality, one would expect its Q3 & Q4 results (Jan-Jun) to be weaker. If LTIGL acquisition is completed in Q2, then Q3 & Q4 result might be good due to full contribution from Vietnam operation.

My personal estimation of Latitude's FY2014 PAT is RM40mil (64% increase from FY2013). This will give it an EPS of 41sen base on 97.2mil shares. Thus, my own target price for Latitude is RM3.30, if we give it a PE ratio of 8x. 

Anyway, I think Latitude's FY2014 net profit has a good chance to exceed RM40mil. Next quarter's result (FY14Q2) will be vital to determine whether to top up the shares.

At current price of RM1.7x, Latitude still looks quite cheap to me.

Both Latitude & Homeritz are perhaps worth to invest in, as both are good and manufacture different types of home furniture.

Last but not least, in Latitude's FY2013 annual report just released last week, Cold Eye Fong SiLing appears to be its no.12 largest shareholder at 1.4%. In FY2012, his name does not appear in the Top 30 largest shareholders list.

16 comments:

  1. Good analysis. Just two comments here:
    1) When comparing the operational efficiency of companies, ROIC is more appropriate metric than ROE.

    Two exactly the same company but have different capital structure can have the same ROE. However, one may have a lot of debt, and no excess cash; while the other has no debt but a lot of excess cash not needed in the ordinary operations. Which company would you like to invest in if they have the same ROE?

    2) Same as above for the different capital structure above. Both company can have exactly the same PE, which one would you prefer to invest in?

    You may have to look at their market enterprise value over their respective Ebit. In term of EV/Ebit, the one with a lot of debt and no excess cash will definitely will be higher and hence expensive.

    ReplyDelete
  2. Thanks K C, I learn something new today.

    The calculation of ROIC seems a bit complicated. I'm not sure whether I calculate it correctly.

    From Investopedia,

    ROIC = PAT (operating) / Invested capital

    Invested capital = Total assets - cash - short & long term investment - non-interest-bearing current liabilities

    For Latitude Tree,

    http://ir.chartnexus.com/latitudetree/website_HTML/attachments/attachment_39681_1383129946.pdf


    ROIC = 32.046 / 450.386 (total assets) - 103.319 (cash) - 0.081 (other investment) - 0.204 (investment securities) - 1.283 (tax payable) - 73.551 (trade & other payables) - 0.13 (derivatives)

    ROIC = 32.046/271.925 = 11.78%

    Is this correct?

    ReplyDelete
  3. NOPAT as shown as the following formula, see link below:

    http://www.investopedia.com/terms/n/nopat.asp

    NOPAT = Operating Income x (1 - Tax Rate)

    Operating income =35658+4469
    Fiance cost is after the operating income

    Tax rate = 3612/35658

    Your invested capital is correct. I usually use
    IC = PPE+net working capital

    Which should come to about the same result.

    You write very good analysis.

    ReplyDelete
  4. Hi K C, really appreciate your feedback.

    I found out that your method for IC calculation is different from what I understood from Investopedia.

    Investopedia's calculation excludes cash but include current borrowings in IC, but your calculation include cash but exclude current borrowings.

    ReplyDelete
  5. Let use your Investopedia formula for IC here:
    Invested capital = Total assets - cash - short & long term investment - non-interest-bearing current liabilities

    For a simple balance sheet without having other items,

    Total asset - cash - investment=PPE+inventories+receivables

    Non-interest-bearing current liabilities = Payables

    Net working capital = inventories +receivables-payables

    Hence your IC will equal to my IC without other items like tax, etc.

    ReplyDelete
  6. I got it. I thought the net working capital you mean is current assets - current liabilities.

    So IC = PPE + Receivables + Inventories - Payables. This is much easier formula.

    Anyway, if there is investment in subsidiaries/associates, it should be included in the IC right?

    For property developers, they will have land held for development, investment properties, property development cost as their assets. I think the former should not but the latter two should be included in IC. Am I right?

    For eg. Tropicana,

    http://ir.chartnexus.com/tropicana/docs/quarterly/Q3_2013.pdf

    The "other current assets" should not be included right?

    ReplyDelete
  7. When we talk about IC, we are talking about capital invested in the ordinary business, not included in subsidiaries/associates which their accounts are not consolidated into the company's financial statements. Their incomes only appear after operating profits.

    For investment properties for property companies are normally part of their ordinary business and hence should be included in IC. Basic principle is whether their revenue/income is consolidated in the financial statements.

    Other items are subjective if to include as IC. For example land held for development in the future I think not, but land under development and property development costs may be yes.

    Anyway, I am not accountant, this is just my opinion.

    ReplyDelete
  8. Thanks again for your kind input.

    ReplyDelete
  9. Your gross margin for Homeritz shows 16.9% only. My number is a lot more than that. Could you confirm that?

    ReplyDelete
  10. I derive the figure from unaudited FY13 results. There is no gross profit or cost of sales column in the income statement, just operating expenses... Now I just realize that it may include the admin expense but I don't know how to calculate the gross profit from there...

    ReplyDelete
  11. Yeah, I couldn't find the gross profit too as costs of goods sold and other expenses were lumped together. However, if you refer to last year's audited financial report, gross margin was 45%. This year, as operating margin has improved from 17% to 18.3%, I presume its gross margin should be at least the same or above its last year's gross margin of 45%. Agree?

    ReplyDelete
  12. From audited 2012 account, I think gross profit should less direct labour cost as well, other than raw materials used, but we don't know how much is the labour cost...

    ReplyDelete
  13. Yeah you are right about the labour cost.

    ReplyDelete
  14. Extracted from AR 2012

    MR LIN, CHIN-HUNG
    Managing Director
    Mr Lin Chin-Hung, aged 32, a Taiwanese, was appointed to the Board of LTHB on 18 January 2012 as the Managing
    Director.
    Mr Lin was the Alternate Director to the Chief Executive Officer and Executive Director, late Mr Lin, Tzu-Keng in LTIG, a
    subsidiary of the Company listed on the Singapore Exchange Securities Trading Limited from 21 May 2009 to 26 December
    2011. From July 2001 to August 2007, he was an assistant to the Managing Director of LTHB where he assisted in the
    marketing, production and purchasing activities of LTHB Group. Mr Lin joined LTIG Group in January 2008 and assisted
    the Head of Operations of RK Resources Co.Ltd. in the procurement and purchases of raw materials.
    Mr Lin attended the Hawaii Pacific University and is currently pursuing the Master in Business Management in National
    University of Kaohsiung, Taiwan.
    Mr Lin is the son of Mdm Lin Chen, Jui-Fen and nephew of Mr Lin, Tzu-Lang. Mdm Lin Chen, Jui-Fen and Mr Lin, Tzu-Lang
    are both substantial shareholders of the Company.

    From the above statement regarding to the profile of managing director,does it raise ur concern on the capability of the MD?

    ReplyDelete
  15. Reyes, I'm actually not too concern about his capability. Though he might be young, but he already has 13 years experience. He's backed by an experienced team.

    ReplyDelete