Furniture

Furniture Stocks Draw Attention

I came to know about Latitude Tree just last week. In the early morning of that day, I still never heard of this stock, but later in that day just before the market closed, I decided to add it into my portfolio.

It is rather impulsive. I saw its share price spiked after a magnificent quarterly financial result.

Latitud is a Malaysia-based furniture manufacturing company founded & controlled by Taiwanese. It started off as a manufacturer of dining chairs in 1988. Now it has grown into a complete medium to high end dining & bedroom sets manufacturer. It also produces living room collection sets and some office furniture.

There are quite a number of furniture manufacturers listed in Bursa Malaysia. I pick 4 of them to do a very simple & superficial comparison. They are:

• Latitude Tree
• Homeritz
• Lii Hen
• Poh Huat

* The information, figures, calculation & opinion provided below might not be accurate or true. Please do own research if in doubt.

Products

Company	Products
Latitude	Wooden furniture
Homeritz	Upholstered furniture
Lii Hen	Wooden furniture
Poh Huat	Wooden furniture

Homeritz is different from all 3 others as it designs and manufactures upholstered home furniture such as leather and fabric-based sofas, dining chairs, bed frames etc. It also has its own brand Eritz since 2009.

The other 3 companies design and manufacture wood-based furniture. Both Latitude & Lii Hen concentrate on home furniture but Poh Huat manufactures both home & office furniture.

Market

All 4 companies export majority of their products to overseas which include the Americas, Europe, Middle East, Australasia & South Africa. 

Latitud exports 99% of its products, in which 92% are exported to the United States (FY2013). The rest are to Canada, Europe, Australia, South Affrica & Middle East. I think it still has a lot of room to expand its presence worldwide.

The other 3 companies claim that they export to more than 50 countries worldwide.

Homeritz's major export destination is Europe, which comprises 41% in FY2011. United States is Poh Huat's biggest export country (?%) while export to the Americas (North & South) makes up 77% of Lii Hen's revenue in 2013.

Facilitiy

Latitude has 3 factories in Malaysia, 2 in Vietnam & 1 in Thailand.

Homeritz & Lii Hen both have 5 factories each in Johor.

Poh Huat has 2 factories in Vietnam, while others in Malaysia, China & South Africa.

Latitude might be less affected by the effect of minimum wages and increased electricity tariff in Malaysia, as its mainly concentrates its production in Vietnam, while scaling down its Malaysia operation.

Market Capitalization

	Latitude	Homeritz	Lii Hen	Poh Huat
Share price	1.74	0.56	1.64	0.85
M/Cap (mil)	169.1	112.0	98.4	96.4

Latitude has biggest market cap followed by Homeritz.

Financial Performance

RM mil	Latitude	Homeritz	Lii Hen	Poh Huat
Revenue	493.7	112.9	346.5	392.0
PAT	24.4	15.1	21.3	15.2
Gross margin%	14.4	16.9@	15.4	13.4

*Latitude FY2013 (end June13)

*Homeritz FY2013 (end Aug 13)

*LiiHen FY2012 (end Dec12)

*Poh Huat FY2012 (end Oct12)

@ Operating margin

Latitude sells more and earns more compared to others. However, Homeritz has the best gross margin even though its revenue is the lowest.

For latest financial result,

Latitude and Homeritz break previous years' earning record. Lii Hen & Poh Huat's 9MFY13 revenue & PAT are lower YoY but there is a special one-off loss for Poh Huat.

Balance Sheet

RM mil	Latitude	Homeritz	Lii Hen	Poh Huat
Total Asset	478.6	103.8	190.4	243.3
Total Liab	179.3	16.5	46.8	94.5
Cash	112.5	34.7	40.4	30.2
Borrowings	91.2	2.7	17.6	33.4
ROE (%)	10.5	20.2	15.9	10.7
D/E ratio	Net cash	Net cash	Net cash	0.02

Almost all are in a net cash position.

Homeritz has the best ROE, while Latitude has the lowest ROE but still not too bad above 10%.

Dividend

	Latitude	Homeritz	Lii Hen	Poh Huat
Share price	1.74	0.56	1.64	0.85
Dividend (sen)	6.3	3.0	12.0	2.0
Div Yield %	3.6	5.4	7.3	2.4
Div Payout %	25.0	40.8	33.8	16.0

*Share price at 4th Dec 2013 close

*Base on previous full financial year total dividend

Homeritz & Lii Hen are more generous in their dividend payout. At current share price, Lii Hen has the best dividend yield, followed by Homeritz, Latitude and Poh Huat.

Value

	Latitude	Homeritz	Lii Hen	Poh Huat
Share price	1.74	0.56	1.64	0.85
EPS (sen)	25.07	7.56	35.5	14.04
PE	6.9	7.4	4.6	6.1
NTA	2.57	0.41	2.39	1.37
P/B	0.68	1.36	0.69	0.62

*EPS base on last full financial year earning

All 4 stocks have relatively low PE ratio. This shows that the furniture stocks are not popular and perhaps overlooked.

Due to recent spike in share price, Latitude's PE ratio has gone up from 5.3x to 6.9x. Lii Hen has a very low PE but it is anticipated that its upcoming FY2013 profit will be lower. All except Homeritz are trading below their book value.

       Homeritz's dining set

Out of all of these 4 companies, Homeritz stands out with best gross margin, best ROE, best dividend payout ratio, decent dividend yield and its recent financial results are good. That's why it's the "most expensive" one here.

As all 4 companies are export-orientated, I think they will have good time ahead as the US and Europe are slowly coming out from recession. US house sale seems to recover thus there will be more demand for furniture. The expected strengthening of US dollar will also improve exporters' earnings to a certain extent.

For me, I think Latitude is the best bet in furniture manufacturing, mainly because of its future earning prospect and low projected PE.

       Latitude's bedroom set

Latitude's latest FY14Q1 result records a 27% and 62% increase in revenue and net profit YoY, due to higher orders, production and sales, while the USD has strengthened only 3.6% between these two periods. Its FY14Q1 net profit already makes up 60% of FY2013 full year net profit.

RM mil	FY14Q1	FY13Q4	FY13Q1
Revenue	177.1	124.4	139.7
PBT	20.7	9.4	12.2
PBT%	11.7	7.6	8.7
PAT	14.6	5.9	9.0
MAS Rev	28.9	23.2	29.2
MAS PBT	1.2	-1.0	0.8
VIET Rev	142.2	96.1	106.3
VIET PBT	20.0	12.0	11.7
THAI Rev	6.0	5.2	4.2
THAI PBT	0.02	-0.5	-0.2

In FY2013, there is an increase in monthly production capacity of a factory in Vietnam by approximately USD1.0mil. I am keen to know what is the utilization rate of its overall production capacity and its future plan of capex.

In early 2013, Latitude has proposed to acquire all the subsidiaries of Latitude Tree International Group Ltd (LTIGL) for SGD48.75mil, which includes 99.99% of share capital of Latitude Tree Vietnam Joint Stock Company. Operation in Vietnam (under LTIGL) contributes 100% of Latitude's profit in FY2013 as operation in both Malaysia & Thailand suffer minor loss.

Currently Latitude Tree holds the shares of Vietnam operation indirectly through 77.6% owned LTIGL. Once the corporate exercise is completed, Latitude Tree will directly own 99.99% of its most profitable Vietnam operation. 

The net profit attributed to non-controlling interest for FY2013 amounted to RM7.68mil, compared to RM24.37 net profit for owners of the parent. If both are combined later, its net profit might be 32% more.

For recent FY14Q1, PBT from Vietnam operation increases as much as 70% both QoQ and YoY to RM20mil. To add icing on top, operation in Malaysia turns profitable in this quarter after scaling down of its operation.

Latitude will only need to pay SGD2.3mil cash for the acquisition, the balance of SGD46.4mil will be settled by way of set-off against the capital due to be returned to Latitude Tree. I actually don't understand what it really means, but it seems like Latitude does not need to borrow or deplete its cash substantially, or do share placement to complete the acquisition.

The proposed acquisition is expected to be completed before 31 Dec 2013.

       Latitude's dining set

As Latitud's business is moderately affected by seasonality, one would expect its Q3 & Q4 results (Jan-Jun) to be weaker. If LTIGL acquisition is completed in Q2, then Q3 & Q4 result might be good due to full contribution from Vietnam operation.

My personal estimation of Latitude's FY2014 PAT is RM40mil (64% increase from FY2013). This will give it an EPS of 41sen base on 97.2mil shares. Thus, my own target price for Latitude is RM3.30, if we give it a PE ratio of 8x. 

Anyway, I think Latitude's FY2014 net profit has a good chance to exceed RM40mil. Next quarter's result (FY14Q2) will be vital to determine whether to top up the shares.

At current price of RM1.7x, Latitude still looks quite cheap to me.

Both Latitude & Homeritz are perhaps worth to invest in, as both are good and manufacture different types of home furniture.

Last but not least, in Latitude's FY2013 annual report just released last week, Cold Eye Fong SiLing appears to be its no.12 largest shareholder at 1.4%. In FY2012, his name does not appear in the Top 30 largest shareholders list.