Homeritz is a leading upholstered home furniture manufacturer in Malaysia, focusing on dining chairs, sofas and bed frames.
PETALING JAYA: The Malaysian furniture sector’s long-term outlook is encouraging, and demand growth will resume once the global economy reverts to normalcy in 2021, said a PublicInvest Research report.
The research unit also said furniture demand will be bolstered by trade diversion due to the US-China trade war.
Prior to the Covid-19 pandemic, total Malaysia furniture exports were growing at a compound annual growth rate (CAGR) of 7.6% between 2014 and 2019 to RM11.9bil, in tandem with the growth in the global furniture market.
In addition, Malaysian furniture manufacturers are among the preferred options as buyers from the United States divert its orders from China to countries in South-East Asia.
According to the Malaysian Timber Council (MTC), Malaysian wooden furniture exports to the United States jumped by 38% year-on-year in 2019 to RM4.7bil from RM3.4bil in 2018.
Also, profit margins could improve, given the low raw material prices and a favourable foreign exchange rate.
The report noted that prices of rubberwood, a main raw material used, have fallen and stabilised since the export ban in 2017.
Given the ample supply of rubberwood as well as falling leather prices, margins are expected to improve.
PublicInvest Research also believes exporters will likely benefit from the weak ringgit against the US dollar, and estimates that for every 1% drop in the ringgit, earnings for the furniture stocks under its coverage would increase by 0.8%.
The research unit has an Overweight rating on the furniture sector, and Outperform calls on furniture makers Poh Huat Resources Holdings Bhd, Homeritz Corp Bhd and Wegmans Holdings Bhd.
The report said Poh Huat’s growth will be supported by the higher furniture sales orders especially from the United States, and a change in furniture consumption, likely to be skewed towards affordable panel-based home-office furniture given a change in working environment.
Meanwhile, Homeritz is a leading upholstered home furniture manufacturer in Malaysia, focusing on dining chairs, sofas and bed frames.
PublicInvest Research pointed out that Homeritz is a leader in upholstered furniture manufacturing, has higher-than-average profit margins as an integrated original design manufacturer, and is in a net cash position with no borrowings.
Wegmans Furniture is a Muar-based home furniture manufacturer specialising in dining furniture made from rubberwood.
Regarding Wegmans’ ongoing litigation with the owner of an adjacent piece of land near its new plant, the report said the potential financial impact, if any, would be minimal as it involves a nursery where the owner is mostly seeking damages for the loss of 1,500 trees and the surrounding infrastructure.
Wegmans may be able to claim the financial loss against the insurance company.
The report said furniture stocks are still attractive given the potential annual earnings growth of 37% and 20% for financial years (FY) 2021 and 2022 respectively.
The furniture stocks are valued at 10 to 15 times FY21 projected earnings per share, which translates to price-earnings to growth (PEG) of only 0.14-0.57 times (Wegmans has the lowest PEG due to its relatively stronger earnings growth).
In addition, dividend yield remains high at a three-year historical average of 4%.
Homeritz has the highest dividend yield and for FY20 and FY21, a yield of 4.5%. is projected.
Homeritz had consistently declared high dividend payout, leading to a six-year historical dividend yield of 6.7%.
Target prices for Poh Huat, Homeritz and Wegmans are RM1.80,93 sen and 40 sen respectively.