Latitude: US Home Sales Is The Key?

Latitude Tree FY14Q3 Financial Result

LATITUD	FY14Q3	FY14Q2	FY14Q1	FY13Q4	FY13Q3
Revenue	146.8	184.4	177.1	124.4	107.2
PBT	14.8	26.0	20.7	9.4	5.8
PBT%	10.1	14.1	11.7	7.6	5.4
PAT	12.8	19.0	14.6	5.9	4.3
MAS Rev	32.3	31.6	28.9	23.2	22.5
MAS PBT	3.0	2.1	1.2	-1.0	-0.7
VIET Rev	108.1	147.7	142.2	96.1	79.4
VIET PBT	10.9	24.9	20.0	12.0	8.4
THAI Rev	6.4	5.1	6.0	5.2	5.2
THAI PBT	-0.1	-0.3	0.02	-0.5	-0.7
Total Equity	296.8	270.1	249.8	232.1	222.7
Total Assets	475.5	530.1	478.6	449.8	408.5
Trade Receivables	49.1	58.2	55.4	33.8	38.4
Inventories	90.7	95.4	81.8	89.7	73.0
Cash	109.0	147.4	116.1	96.1	65.8
Total Liabilities	179.3	205.5	179.3	173.4	144.7
Trade Payables	77.7	95.7	85.1	72.9	52.3
ST Borrowings	91.4	95.5	78.9	85.1	75.5
LT Borrowings	8.9	11.1	12.3	13.5	15.3
Net Cash Flow	11.5	48.2	14.6	41.9	12.2
Operation	55.5	42.2	20.3	52.9	30.6
Investment	-34.0	-4.1	-1.2	-3.1	-2.4
Financing	-5.8	5.0	-8.6	-7.4	-14.8
EPS	13.12	19.52	15.02	6.12	4.43
NAS	3.05	2.78	2.57	2.39	2.29
Net D/E Ratio	NC	NC	NC	0.01	0.11

For its latest FY14Q3 result, Latitude's revenue and PBT rise 37% and 155% respectively YoY. This is mainly due to higher order, higher production capacity and higher margin products.

However, if compared to preceding quarter of FY14Q2, revenue and PBT in latest quarter drop 20% and 43% QoQ respectively.

Besides seasonality reason (lower order after Christmas & New Year), higher cost of raw material also contributes to lower margin and thus lower profit.

Cash & equivalent reduces by RM38mil, mainly due to expense on group restructuring (RM34mil on acquiring remaining shares of LTIG). Overall, its cash flow is still positive.

Balance sheet is still favourable with positive cash position, while net asset per share has increased to RM3.05.

This set of result is widely expected and there is no surprise. So I think this is the reason its share price drops after result announcement.

The riots in Vietnam earlier has caused a loss of 8 production days for Latitude. So we might expect a "poorer than expected" result for the next quarter.

If there are 72 production days in a quarter (6 days a week), then 8-day loss of production will be a potential 11% lower revenue. However, not all factories are affected. If the factories are running 7 days a week, then the negative effect will be even lower.

What is more important to me is whether the demand of Latitude's products is still there. 

As Latitude exports almost all of its products to the US, it is essential to know how US property market perform as furniture sales should be closely related to it.

The charts below show US new & existing home sales since year 2010.

       US new home sales 2010-2014

       US existing home sales 2010-2014

Both new and existing home sales in the US are generally in the uptrend for the past 4 years. However, they do drop a bit in recent few months.

I always read that US and Europe economies are still in the process of recovery, but Asian and emerging markets seem to be in danger of major collapse.

So does this mean that US will only grow in the next few years?

How was the US doing in the era before 2007-08 Global Financial Crisis?

The charts below show new & existing home sales in the US since year 2000.

       US new home sales 2000-2014

       US existing home sales 2000-2014

It seems like current level of home sales is still far below the highest level in year 2006. If the home sales can climb back to pre-2006 level, then it can only be good to Latitude.

Besides, it is also good to know the consumer spending & sentiment in the US at the moment. Generally they are not declining.

       US consumer sentiment 2008-2014

       US consumer spending 2000-2014

In summary I believe that US demand of furniture will increase in the near future. Latitude may benefit from this trend unless its production capacity is "maxed out" or it is not competitive enough.

So, I will continue to hold its shares, while waiting for its next quarter's result.