FLBHD (5197) - A good opportunity to buy a fundamentally solid company at very attractive valuations - FLBHD

 We expect Focus Lumber (Fundamental: 1.75/3,Valuation: 1.8/3) to record a turnaround in earnings this year,underpinned by robust growth in demand for recreational vehicles (RV) in the US.

Sabah-based Focus Lumber focuses on a niche and lucrative RV market in the US, as it is able to command a better pricing for its plywood. This is due to the fact that the RV market has higher quality requirements, such as plywood with good finishing and low formaldehyde emission.

As a result, the company has been consistently profitable since its listing in 2011. Between 2011 and 2015, net profit has grown by a compound annual growth rate of 23.3% to RM31.7 million on the back of a 10.3% CAGR in revenue to RM180.7 million.

However, earnings hit a speed bump in 2016. Net profit fell 39.5% to RM19.2 million, due to foreign exchange losses (compared to forex gains a year ago), lower selling prices in US dollars and revocation of a double tax deduction benefit on freight charges effective 2016. Adjusting for forex losses/gains, normalised net profit actually declined by a lower margin of 25.5%. Despite the drop in earnings, return on equity remained decent at 12.9%.

Revenue grew 11.5% to RM201.5 million. This was mainly due to double-digit growth in sales volume. According to data from the US' Recreation Vehicle Industry Association, RV shipments rose 15.1% to 430,961 units last year, a record high in 40 years.

RV shipments are expected to continue their robust growth this year, driven by an improving US economy, consumer preference for the RV lifestyle and innovative RV designs. Already, RV shipments have risen by 8.6% year on year in the first two months of the year.

Focus Lumber has a cash-rich balance sheet with net cash of RM92.4 million or 89.5 sen per share - equivalent to 53% of its market capitalisation- Excluding net cash, the stock is trading at a trailing price-earnings ratio of only 4.3 times.

Dividend per share ranged from 6 sen to 15 sen over the last six years, with an average payout ratio of 47.1%.The company paid six sen dividend in 2016, giving a yield of 3.6%. We expect total dividends of 8 sen to 10 sen per share for this year, translating into an above-market average yield of 4.7% to 5.9%.

Its share price took a beating last year, down a whopping 42.3% to end the year at RM1.60. We believe the stock is oversold and view the selldown as a good opportunity to buy a fundamentally solid company at very attractive valuations.

Notably, executive director and substantial shareholder Lin Hao Yu has been accumulating shares of Focus Lumber on the open market. He acquired a total of 1.5 million shares or a 1.4% stake at prices from RM1.48 to RM1.71 between August and December last year.

source: The Edge Insider Asia