Latitude: Probably Deeply Undervalued

Latitude Tree FY14Q2 Financial Result

LATITUD	FY14Q2	FY14Q1	FY13Q4	FY13Q3	FY13Q2
Revenue	184.4	177.1	124.4	107.2	122.4
PBT	26.0	20.7	9.4	5.8	8.3
PBT%	14.1	11.7	7.6	5.4	6.8
PAT	19.0	14.6	5.9	4.3	5.1
MAS Rev	31.6	28.9	23.2	22.5	25.9
MAS PBT	2.1	1.2	-1.0	-0.7	-1.2
VIET Rev	147.7	142.2	96.1	79.4	91.6
VIET PBT	24.9	20.0	12.0	8.4	10.1
THAI Rev	5.1	6.0	5.2	5.2	4.9
THAI PBT	-0.3	0.02	-0.5	-0.7	-0.3
Total Equity	270.1	249.8	232.1	222.7	219.8
Total Assets	530.1	478.6	449.8	408.5	417.2
Trade Receivables	58.2	55.4	33.8	38.4	35.5
Inventories	95.4	81.8	89.7	73.0	76.4
Cash	147.4	116.1	96.1	65.8	71.1
Total Liabilities	205.5	179.3	173.4	144.7	158.3
Trade Payables	95.7	85.1	72.9	52.3	48.8
ST Borrowings	95.5	78.9	85.1	75.5	89.1
LT Borrowings	11.1	12.3	13.5	15.3	17.9
Net Cash Flow	48.2	14.6	41.9	12.2	17.9
Operation	42.2	20.3	52.9	30.6	16.4
Investment	-4.1	-1.2	-3.1	-2.4	-2.9
Financing	5.0	-8.6	-7.4	-14.8	5.2
EPS	19.52	15.02	6.12	4.43	5.24
NTA	2.78	2.57	2.39	2.29	2.26
Net D/E Ratio	NC	NC	0.01	0.11	0.16

The share price of Latitude fell 3 days in a row before the announcement of its FY14Q2 result, I'm a bit worried that there will be a bad surprise like Zhulian.

Now it seems like the selling pressure may be due to recent strange phenomenon in which share price will NOT move up even though the company produces good financial result. 

Many people may have bought Latitude in anticipation of an immediate trading gain after its result announcement. When they feel that this is unlikely to happen, they sell first.

Now its result is out, and it is a magnificent result. However, it is also widely expected as well. Where will its share price head afterwards? 

Latitude's share price has appreciated quite a lot after the company made a special announcement on LTIG's financial result in early Feb, are all the expected goods news already factored in the current share price?

Will it follow the recent "strange phenomenon"?

For FY14Q2, even though revenue grows a mere 4% to RM184.4mil, net profit attributable to shareholders jumps 30% to RM19mil, not far away from RM20mil I guesstimated earlier.

At 1HFY14, revenue of RM361.5mil is 38% higher than RM262.1mil of corresponding period last year, while net profit to shareholders soars 138% from RM14.1mil to RM33.6mil.

If we look at the table above, this is mainly due to its Vietnam operation which has USD1mil increase in monthly capacity since last year.

The vast improvement in Vietnam production is due to higher orders, higher production, higher margin & selling price of certain products, and strengthening of USD against RM by 4.3% in the past 6 months.

This is helped by the recovery of economy and house sales in US where Latitude exports 99% of its furniture to.

After scaling down the operation, its Malaysia production is also profitable for 2 quarters running supported by higher revenue.

Latitude has completed the acquisition of its remaining shares in Vietnam operation (LTIG) on 23 Jan 2014, thus it will start to enjoy full contribution from LTIG starting from its next quarter's result.

Including the non-controlling interest, Latitude's profit after tax in FY14Q2 is RM23.6mil.

If we annualize 1H14 net profit to shareholders of RM33.6mil, Latitude may give a full year net profit of RM67mil. This does not even include future contribution from 100% LTIG acquisition!

However, it is also not clear whether Latitude can sustain its revenue and profit throughout the year as from historical point of view, its revenue and especially net profit fluctuate a lot.

Some may argue that Latitude's earning is affected by seasonality, but its current 2nd quarter is usually not a strong quarter and it still can produce great results.

I'll assume a conservatively-estimated net profit of RM60mil for Latitude in FY14 that ends in June 14. With paid up shares of 97.2mil, projected EPS will be 62sen. If I were to give it a lower PE of 8x, its target price should be RM4.96.

At RM2.54 yesterday, Latitude still has a potential 100% upside even the target price is calculated in a conservative manner! It is currently traded at a low projected PE of only 4.1x.

So I'll revise my target price for Latitude upwards from RM4.12 to RM4.96. If fair PE is 10x, its target price could be easily RM6.20. However, I will not aim so high pending next quarter's result.

Latitude still does not reach my core portfolio yet even though I have further bought its shares this month. Last year when I first bought its shares, I was expecting a poorer FY14Q2 result compared to Q1. With its latest result like this, I'll be more confident to promote it into my core portfolio.