Furniture Sector As A Proxy to Stronger US Consumption

PublicInvest Research has started coverage of the furniture sector, including Poh Huat, Homeritz and Wegmans, which would be a proxy to stronger US consumption.

In its research note issued on Thursday, it had an overweight call on the sector.

“Despite near-term headwinds, we remain optimistic on the furniture sector’s long-term outlook as we are expecting demand growth for Malaysian furniture to resume once global economy recovers and reverts to normalcy in 2021.

“Furthermore, we are of the view that furniture demand will be further bolstered by trade diversion due to US-China trade war, ” it said.

PublicInvest Research said due to the low raw material prices and a favourable foreign exchange rate, profit margins could potentially improve on the back of lower raw material costs and stronger revenue in ringgit terms.

It has a target price of RM1.80 for Poh Huat whose growth will be supported by the higher furniture sales orders especially from the US.

While a near-to medium-term prospect appears to be challenging due to the Covid-19 pandemic, it remains optimistic of Poh Huat’s long term prospects.

Growth will be underpinned by the US-China trade diversion as there will be a change in furniture consumption, likely to be skewed towards affordable panel-based home-office furniture given a change in working environment.

“Poh Huat will likely benefit from the depreciating ringgit and the stabilising raw material prices. As such, we are initiating coverage on Poh Huat with an Outperform rating and a TP of RM1.80 based on a 10 times PER pegged to FY21 EPS, ” it said.

As for Homeritz, it has target price of 93 sen as it is one of the leading upholstered home furniture manufacturer in Malaysia, focusing on dining chairs, sofas and bed frames.

While near-term prospect seems challenging with consumers become more prudent in spending, affecting demand for big ticket items like furniture, PublicInvest Research expects Homeritz to fare better over the longer term

The research house said the company will be able to benefit from the US-China trade war, lower raw material prices as well as the favourable foreign exchange rate, ” it said.

“In addition, Homeritz had consistently declared high dividend payout, leading to a six-year historical dividend yield of 6.7%, ” it said.

PublicInvest Research said it liked Homeritz for its 1) leadership in upholstered furniture manufacturing 3) higher-than-average profit margins as an integrated original design manufacturer 3) net cash position with no borrowings.

“Therefore, we initiate coverage on Homeritz with an Outperform rating and a TP of RM0.93 based on a 12 times PER multiple to FY21F EPS, ” it said.

As for Wegmans, a Muar-based home furniture manufacturer, it has an Outperform and TP of 40 sen. The company designs, manufactures and sells home rubberwood furniture products.

Although outlook for the near term is affected by the impact of the Covid-19 pandemic, PublicInvest Research remains optimistic on Wegmans’ long-term growth, largely driven by its capacity expansion which doubles its existing manufacturing capacity.

“Demand is likely to be further fueled by the trade diversion as a result of US-China trade war. As such, we are initiating coverage on Wegmans with an Outperform call and a TP of 40 sen based on 15 times multiple to FY21F EPS, ” it said.

Source: PublicInvest Research