Writers' picks

Poh Huat Resources Holdings Bhd

THE export-based furniture maker will likely deliver robust earnings growth again in 2017 after an impressive performance in 2016. For one thing, the expected further strengthening of the US dollar will be a boon for the company.

For another, the recovery of the US housing market, which implies an improving furniture market in the United States – a major export destination for Poh Huat – will mean better sales for the Johor-headquartered company.

In addition, Poh Huat’s recent venture into Australia could open a whole new opportunity for the group.

These factors spell potential upside for the dividend-paying stock, which is currently trading at an inexpensive eight times forward earnings.

Poh Huat posted a net profit of RM47.06mil, or 22.05 sen per share, for the financial year ended Oct 31, 2016 (FY16). This represents an earnings growth of about 20% from the corresponding period last year.

The group’s earnings growth was in tandem with its higher turnover, which was at an all-time high of RM535.22mil for the year in review.

In line with its better results, Poh Huat has declared a higher total dividend of eight sen per share for FY16, compared with five sen per share in the preceding year.

Poh Huat has attributed its topline growth to sustained demand for the group’s products in line with the sustained demand for its furniture from the US and Canadian markets, and stronger US dollar, which resulted in higher proceeds.

Poh Huat notes that the demand for household furniture in the United States will likely continue growing over the next few years. The company points out that the US furniture industry has been outpacing the country’s economic growth in recent years.

In the United States, the industry is performing roughly twice as well as the overall economy, due in large part to the strong performance in bedroom and dining room furnishing sales, according to Poh Huat.

As for its new venture in Australia, while it may take time to gain meaningful market share, the development is expected to boost the group’s growth potential over the long-term and diversify its reliance on the north American market. – By Cecilia Kok

VS Industry Bhd

VS Industry is poised for a record performance on production volume growth, supported by the strong US dollar. The largest electronics manufacturing services provider in Malaysia is set to achieve this on the back of significant sales volume growth expected from existing key clients.

VS Industry has been busy gearing up its operations to receive new sales orders from its United Kingdom-based key client, who is famous for its vacuum cleaner products.

VS Industry is setting up new production lines with a capacity to assemble up to three million units of vacuum cleaners per annum, from a negligible volume at present. The first line is up and running.

VS Industry also expects strong orders for the coffee-brewer machines it produces. Its US-based client is launching a new brewer model in early 2017. The new model was fully-designed by VS Industry and it has been granted 18 months of exclusive manufacturing rights. The client has committed to place a minimum of US$82mil worth of orders for this model alone over the next three years.

VS Industry expects its second-half of financial year ending July 31, 2017 (FY17) to reflect the results of its new orders and increased capacity, with full reflection of performance in FY18. There are currently at least four research houses actively covering the stock, with all having “buy” recommendations on VS Industry with target prices ranging from RM1.68 to RM1.72. Judging from the analysts’ earnings estimates, they expect VS Industry to register a record net profit in FY17, surpassing the RM132.7mil achieved in FY15.

The current strong US-dollar environment should play to VS Industry’s advantage, as 80%-90% of sales from its Malaysian operations are denominated in US dollars.

VS Industry has a dividend policy of 40% net profit payout, with quarterly dividend declarations. – By Risen Jayaseelan

Lay Hong Bhd

THERE is still much upside to be expected from poultry company Lay Hong Bhd’s venture with Japan’s NH Foods Ltd.

The joint-venture company, NHF Manufacturing Sdn Bhd, recently launched five Nippon Premium Nutriplus products, and will continue rolling out new frozen processed chicken products.

These products have a double-digit profit margin, which will progressively contribute to Lay Hong’s earnings, going forward.

Lay Hong is also on track to build a new manufacturing facility to support the current production volume of Nippon Premium Nutriplus products.

The plant, which will commence operations by 2018, has a production capacity of 2,000 tonnes of food per month, which can be increased to 4,000 tonnes a month.

With Jakim’s (Department of Islamic Development Malaysia) halal certification in hand, these products are marketed both locally and abroad, beginning with the halal market in countries like Singapore and Indonesia, as well as Japan.

Lay Hong’s market share for the processed and ready-to-eat food segments is expected to grow to more than 10% after 2018 from 6%.

In line with the growing population, the demand for chicken and eggs is set to rise.

Hence, Lay Hong is increasing its egg production from 1.8 million to three million eggs per day, while its chicken production will rise from one million to two million birds per month.

Four egg production plants and three broiler plants will be built accordingly.

Lay Hong’s earnings for the financial year 2017 is expected to improve, as a one-time expense for an employee share option scheme of RM3.6mil was accounted for in the previous financial year.

With such prospects, Lay Hong is a stock to hold for the long term. – By Toh Kar Inn

Reach Energy Bhd

LET’S look at the macro situation. Foremost is the Organisation of the Petroleum Exporting Countries (Opec) and non-Opec players will cut production by 1.8 million barrels a day for a total global production cut of 2%.

Second, a large number of shale players have hedged huge amounts of forward contracts above US$50.

Third, oil majors such as BP Plc and Royal Dutch Shell have started investing.

Also there is the likely listing of Saudi Arabia’s state oil producer Saudi Aramco in 2018, followed by US president-elect Donald Trump’s appointment of ExxonMobil CEO Rex Tillerson as the US secretary of state.

Reach Energy is a full-fledged exploration and production company, and hence can be valued on its reserves and business.

The main thing depressing Reach Energy shares at the moment is its upcoming placement exercise of RM180mil, which is meant to pay off dissenting shareholders. Without this exercise, Reach Energy cannot begin operations on its Kazakhstan asset. There are strong indications that management has decided to shelve this placement exercise and will put this issue to rest over the next few weeks.

Without the placement exercise, the overhang and dilution concern on Reach Energy shares will be removed.

On its real business, the ramp-up in Reach Energy’s Kazakhstan’s asset – the Emir-Oil concession – is just beginning.

The Emir-Oil concession has proven reserves of 89.4 million barrels of oil equivalent. While it was producing some 2,500 barrels in 2015, this will be increased to 5,000 barrels in 2017 before doubling to 10,000 barrels in 2019.

Using the oil price assumption of US$40, RPS has forecast the Emir-oil concession to be profitable for its year ended Dec 31, 2017.

Assuming oil prices at US$40, the Emir-Oil concession is projected to earn a revenue of US$69.43mil (RM305.49mil) and operating profit of US$27.47mil (RM120.97mil) by 2017. It will also be net cash-flow positive, generating US$2.17mil (RM9.55mil) by end-2017. Reach Energy has a 60% stake in the Emir-Oil concession.

Brent crude is at US$56.

Emir-Oil’s operating profits are projected to reach a high of US$269.6mil (RM1.19bil) in 2023, which is 10 times the profits it will make in 2017.

By then, it will be in a net cash-flow position of US$144.06mil (RM633.86mil), using the oil price assumption of US$75.80. – By Tee Lin Say