WHETHER it is due to stigma or investors’ preference, there is often high tendency for the furniture sector to be overlooked as an unprofitable sector.
But this is not the case for UOB Kay Hian Research which expects furniture industry players to generate earnings momentum in 2H 2020, boosted by catalysts such as (i) structural demand shift on the US-China trade tension; (ii) pent-up demand for furniture, riding on the work-from-home trend; and (iii) margin expansion on price hikes and improved utilisation.
“Local furniture companies such as Liihen Industries Bhd, Homeriz Corp Bhd and Poh Huat Resources Holdings Bhd, which export mostly to the US and Europe, will benefit,” wrote analyst Jack Goh in a sector update.
While Malaysia’s furniture sector has remained resilient in the recent market sell-down, underpinned by the work-from-home global trend, the research house revealed that the upstream supply chain sub-sector remains very much under-appreciated.
Zooming in on particle board companies as it expects them to turnaround from losses, UOB Kay Hian Research is keen on Mieco Chipboard Bhd and HeveaBoard Bhd which are backed by robust demand, sharply higher prices and favourable sales mix.
“We gathered that Mieco and Hevea are seeing overwhelming demand from local furniture manufacturers since the recovery movement control order (in June), and their order visibility remains good through to 1Q 2021 even though their production lines are currently running close to full capacity at 80-90% utilisation rates,” noted Goh.
In fact, the shortage of particle boards in the market to fulfil explosive export demand (particularly to the US) has led to aggressive average selling price revision with chipboards prices surging by as much as 20-30%.
“Mieco, in particular, has greatly benefitted from price hikes and the shift in sales mix,” Goh pointed out.
All-in, UOB Kay Hian Research upgraded furniture and particleboard companies to “overweight” as it expects them to generate strong earnings momentum on robust demand and better margins.
“We note that particle board companies’ share price recoveries are in sync with that of furniture producers and could outperform the furniture sector with the segment’s expected claim to earnings prominence and turnaround from losses in 2H 2020,” projected Goh.
The research house also retained Mieco as its top pick for the particleboard segment despite the company’s share price having appreciated more than 40% over the past two months.
“Besides nursing itself back to high profitability, Mieco (maintained “buy” with higher target price of 55 sen from 48 sen previously) is on course to restructure some of its short-term debts for a healthier balance sheet,” added UOB Kay Hian Research. – Nov 3, 2020
