Latitude Tree bound for a recovery after 3 years


Furniture maker Latitude Tree Holdings Bhd can finally expect a rebound in its earnings in the coming year ahead, after three years of recording dismal net profits.

AllianceDBS Research Sdn Bhd analyst Cheah King Yoong said the company can expect a strong earnings rebound for its financial year 2019 (FY19) as a result of higher orders from the US’ furniture retailers due to escalating US-China trade tensions.

“Upon enduring a challenging FY18, we are optimistic that the group is poised to register a strong earnings rebound in FY19, driven by growing orders supported by strong appetite of furniture retailers, particularly with the US’ furniture retailers

“Furniture retailers from the US are diverting their procurement activities from China to alternative sources due to escalating US-China trade tensions,” Cheah said in a note last week.

So far, a 10% tariff has been imposed on Chinese furniture manufacturers by the US and the tariff rate could be raised to 25% in early 2019 if no agreement is reached between the US and China.

There is no tariff imposed on Vietnam’s furniture export to the US at present, supported by the Bilateral Trade Agreement between the US and Vietnam since 2001.

“Our meeting with management indicates that since July, the order from the US has risen significantly and the group’s plants in Malaysia and Vietnam are running at high capacity to meet the
rising demand.

“In fact, we gather that the demand is so overwhelming that the group has planned to be more selective with their orders and opt for high-margin orders going forward,” Cheah added.

However, subsiding trade tensions between the US and China would be a risk factor for Latitude as it could reduce demand from the US’ furniture retailers.

Latitude specialises in the production of rubberwood-based high- to mid-end dining and bedroom furniture for export.

More than 90% of the group’s products are exported to the US.

Other factors that would boost the earnings of the group are a stronger ringgit against the greenback, and a low base in FY18 due to a fire incident at its plant in Vietnam which is already back to full operation in June 2018.

“The group will also benefit from the decline in rubberwood price — as has been the case since March 2018 — which mainly dragged the falling demand from China’s furniture manufacturers.

“Being a dominant furniture manufacturer in Malaysia, rubberwood cost serves as a key raw material for the group, accounting for about 50% of its raw material costs,” he said, adding that the falling rubberwood price could expand the group’s margin given its high contributions to Latitude’s cost of goods sold.

In terms of the stock’s fair value, AllianceDBS valued the stock at RM5.25, pegging on a price earnings (PE) of nine times, which is in line with its historical mean PE.

“We believe the market has underappreciated its earnings rebound story given that the stock is under-researched and not well covered.

“Furthermore, favourable investment themes, such as prime beneficiary of the escalating US-China trade tensions and proxy to the strengthening of the US dollar, could serve as catalysts to re-rate the stock,” Cheah said.