October 16, 2021

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Insights 4 : Federal Furniture Berhad - The Proxy To Starbucks Expansion

Q3 Results of FFHB which was released on 30 Nov 2015 exceeded expecatations of many. Most would know by now many counters that has run up are export counters such as glove makers / wood / furniture / E&E. Simply because of the weak MYR, these companies are making supernormal profit margins which were nowhere to be seen over the past few years. Q3 has shown that the EPS increased from 0.12 sens to 2.73 sens. which is a 23 times increase in net profit YoY. The NTA also increased to RM0.52. Looking at the immediate past 3 quarters, the revenue and EPS increased respectively each quarter at an alarming rate:

There are many ways to look at this counter to arrive at a fair value. My method usually is to rely on trailing EPS and apply historical average PE to arrive at a fair value. I believe a simple analysis of the quarterly results coupled with macro outlook will help reach a more accurate result because only earnings of shares can drive share price upwards in less favourable market condition.

Most furniture company has shot up and most would think there are no more opportunities for counters like this. Think again. Gems are in the market waiting to discovered. This is one of it. FFHB is not a conventional furniture maker. Apart from it being a furniture play, it is in actual fact, a Starbucks play. As the sole exclusive licensee of the Starbucks supplier of furniures / ID / fitting for Asia Pacific (excluding China), the potential of this counter is tied to Starbucks growth strategy which is to continue expanding the presence in South East Asia and China as the growth driver. If you believe in the potential growth of Starbucks, then dont hesistate to jump in.

Global and Channel Expansion

Starbucks China and Asia-Pacific region represent enormous, immediate, high-value opportunities for the company, and Starbucks today announced plans to double its store count in China – to over 3,000 stores – by 2019. When completed in the second quarter of 2015, Starbucks acquisition of Starbucks Japan – the company's first international market outside of North America and with more than 1,000 stores its second largest market overall in retail store sales – will position Starbucks to further accelerate growth in the dynamic, rapidly-growing CAP region.

Starbucks is the industry leader in premium single serve, premium packaged roast and ground coffee, and Ready-to-Drink products served outside the company's retail stores and is ideally positioned to grow its share of these markets both in the U.S. and globally. At Investor Day 2014, company leaders will share that over the next five years Starbucks Channel Development segment will grow its revenue by 60%, nearly double its operating income, and more than double its RTD business outside of the U.S. with a specific focus on unlocking untapped opportunities across the company's China and Asia-Pacific region.

Based on a trailing EPS of last 4Q of 5.54 sens, at current price of 91 sens, it is trading at 16x PE. This would appear fairly valued. However, this is only on the surface. With one more quarter for the financial year, in terms of revenue and net profit, FFHB is only behind the best financial year results in 2012 by a mere RM12million and RM300k respectively. It is almost 100% set in stone that FFHB will exceed 2012's full years revenue and net profit based on the latest quarterly results.

With this in mind, the potential for FFHB to deliver a record results within the past 5 years is almost certainty. Against its peers (furniture exporters), PoHuat / Hevea / SHH is trading at an average of 12x. Moving forward, I am confident the next 2 Quarters EPS will be at least 3 sens each. This is a very conservative stance as FFHB is not a pure furniture exporter. With a total forward full year EPS of 9.84, applying a multiple of 10, the fair value of FFHB should be RM0.98. However, as FFHB is now starting to reap the rewards from entering China on top of being the sole exclusive licensed supplier to Starbucks for Asia Pacific, I think continue applying a multiple of 10 is unfair. This is coupled with the fact the company is mulling to formulate dividend policy to reward loyal shareholders. As such, I raise the multiple to 12x and conservatively forecast the next 4Q EPS to be at 10 sens, this would bring the FV to RM1.20 which in my opinion is reasonable. I will likely revised my TP upwards should the next quarter results exceeds my expectation of 3 sens EPS.

Food for thought: The top is never in sight if vitiated by hope.

May good fortune come your way!

Disclaimer: This is not a recommendation to trade. It is merely the expression of the author's personal opinion and shall not be held responsbile for potential gains or losses executed by readers.

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This  information should not and cannot be construed as or relied on and (for  all intents and purposes) does not constitute financial, investment or  any other form of advice. Any investment involves the taking of  substantial risks, including (but not limited to) complete loss of  capital. Every investor has different strategies, risk tolerances and  time frames. You are advised to perform your own independent checks,  research or study; and you should contact a licensed professional before  making any investment decisions.

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