Malaysian furniture makers back on growth track

Malaysian furniture makers back on growth track

THE outlook for the Malaysian furniture industry is positive this year although it continues to face some lingering challenges, say research analysts.

A general bullish outlook is due to a number of factors that include the relaxation of movement restrictions, which help furniture manufacturers resume their operations and enhance their supply chain issues.

Then there is also robust demand from the North America region, driven by work-from-home arrangements and the trade diversion from the United States-China trade war.

However, challenges such as elevated raw material costs, persistent foreign labour shortage and concerns on the manufacturing sector’s labour practices continue to cloud the industry’s outlook, says Hong Leong Investment Bank Research (HLIB Research).

Also, due to severe floods in parts of peninsular Malaysia during mid-December 2021, rubber wood cost could see some increase in the near term due to the temporary supply strain caused by the difficulty in harvesting wood logs as well as the difficulty in transporting the wood logs to customers.

“On the supply side, we understand that the floods impacted the delivery of rubber wood for a week after the event, but has since started normalising,” says HLIB Research.

The research unit also notes that while flood-affected households will likely need to replace their damaged furniture, this will only have a marginal effect on the furniture companies it covers (Evergreen Fibreboard Bhd, Homeritz Corp Bhd, Lii Hen Industries Bhd and Heveaboard Bhd).

This is because these companies are export oriented and have less than 5% of their sales from the local market.

A small uptick in sales to the local market could be expected for Lii Hen and HeveaBoard, as they have a small local presence through e-commerce channels.

The research unit notes that the country’s wooden furniture export value in the first 10 months of 2021 had declined by 2.8% year-on-year to RM8.15bil, due to the long production halt for the furniture industry from June to mid-September last year as a result of movement restrictions.

The US continues to be the largest export market, making up 62.8% of the total export value.

Regarding elevated raw material costs, HLIB Research points out that key raw materials (rubber wood, glue, steel, foam, leather, and packing materials) had been on an increasing trend since the fourth quarter of 2020.

“Glue cost in particular has seen a steep increase mainly due to the rise in crude oil price as well as higher urea price as demand for oil palm fertilisers increase,” it says.

Also, despite having spare production capacity in their factories, furniture companies are unable to scale up their productivity due to the production bottleneck caused by a labour shortage.

“If the foreign labour intake materialises, it would provide a shot in the arm for the furniture industry and would be a major catalyst to drive earnings growth,” opines HLIB Research.

Meanwhile, Evergreen’s regional production base helps to mitigate the impact of the production halt in Malaysia as it was able to divert some of its medium-density fibreboard orders from Malaysia to Thailand.

Evergreen is also enjoying an upcycle in the panel board market, supported by the growing demand from furniture makers in Malaysia and Indonesia as well as the increase in export demand from the Middle East.

The research unit points out that Evergreen’s integrated operations from upstream to downstream products allows it to be well positioned to ride on the current upcycle in the panel board market as well as the growth in the furniture industry.

Homeritz’s position as an original design manufacturing (ODM) manufacturer allows it to withstand cost pressure and command better margin and retain customers, it says.

Homeritz is an integrated designer, manufacturer and exporter of a complete range of upholstered home furniture.

HLIB Research also notes that Homeritz, Lii Hen and HeveaBoard are net cash companies.

“Covid-19 reminded us that having a good buffer of cash is useful to develop financial resilience in surviving a business downturn,” it says, adding that Homeritz has net cash of RM91.8mil or net cash per share of 22 sen.

HLIB Research also says it is positive on HeveaBoard due to an increase in demand from the Japanese market for its particleboards, the group’s shift in focus to produce higher margin boards, the potential capacity increase in ready-to-assemble (RTA) furniture from foreign labour intake, the encouraging RTA furniture sales growth to e-commerce sellers, and the scaling up in capacity for its fungi cultivation segment.

“Furthermore, we expect the current elevated cost of rubber wood and glue to ease from the first quarter of 2022 onwards as weather conditions improve and urea prices stabilise.

“We also expect HeveaBoard to benefit under a declining raw material cost environment as it typically does not adjust its selling price frequently, thus, resulting in margin expansion,” it says.

As for Poh Huat Resources Holdings Bhd, TA Securities Research is optimistic on the group’s outlook as it has finally returned to full operations following the relaxation of movement restrictions in both Malaysia and Vietnam.

On top of that, Poh Huat is currently supported by firm sales orders for delivery through April 2022.

According to Poh Huat’s management, the demand from the US for furniture products remains strong, thanks to the trade diversion due to the ongoing US-China trade war.

Based on trade data from the United States Census Bureau, US furniture imports from China have been steadily declining while Malaysia and Vietnam are gaining market share.

Also, Poh Huat’s management had guided that it has revised its average selling prices upward to pass on the higher cost of materials to customers.

In terms of the cost of production, prices of raw materials such as particle boards have increased due to robust demand from the furniture players.

“The group had made a lot of advanced raw materials purchases in 2021 in anticipation of a further increase in materials cost. In terms of wages, operations in both Malaysia and Vietnam are expected to remain stable,” says TA Securities Research.

Meanwhile, Poh Huat’s workers in Malaysia are expected to move into a new hostel by the first half of this year. The group also recently completed a new showroom in Serenia City, Selangor.

Poh Huat aims to allocate up to RM10mil each year for machinery upgrading and automation to improve its productivity further.

On Wegmans Holdings Bhd, PublicInvest Research expects a strong earnings recovery for the group in the fourth quarter of 2021, given the resumption in its production activities.

Wegmans’ growth will be driven by better economies of scale, strong backlog orders as well as the sturdy demand especially from the North America region.

“We gather that during the temporary suspension, there were no cancellation in orders and the backlog orders have been stretched till May 2022,” it says.

While rising raw material costs will have a negative impact on Wegmans’ margins, the group plans to mitigate the impact by gradually increasing its selling prices.

https://www.thestar.com.my/business/business-news/2022/02/05/malaysian-furniture-makers-back-on-growth-track