Low rubberwood prices, due to the raw materials export ban imposed by the govt in 2017, will also boost the companies’ margins
by ASILA JALIL / pic by ARIF KARTONO
THE Malaysian furniture industry is set to see a surge in growth next year, as furniture demand gets a trade diversion boost amid the US-China trade war.
As US buyers divert orders from China to South-East Asian countries, Malaysian wooden furniture exports to the US have jumped by 38% year-on-year in 2019 to RM4.7 billion from RM3.4 billion in 2018, Public Investment Bank Bhd (PublicInvest Research) wrote in a report yesterday.
“Although 2020 demand is expected to be disrupted by the impact of Covid-19, we are of the view that Malaysian furniture will continue its growth in 2021 once the global economy recovers and reverts to normalcy,” it added.
Malaysia was the 11th largest furniture exporter worldwide in 2019. Around 80% of the country’s furniture production is sent abroad, with the US, Japan and Australia being the major export markets.
In June this year, Malaysia’s furniture exports stood at RM5.4 billion, of which wooden furniture exports amounted to RM4.1 billion.
Wooden furniture shipments were also the largest component of domestic furniture exports in 2019, accounting for RM9.14 billion.
“The furniture industry has consistently contributed between 0.3% and 0.4% of Malaysia’s GDP,” PublicInvest Research said.
It sees local furniture players such as Homeritz Corp Bhd, Poh Huat Resources Holdings Bhd and Wegmans Holdings Bhd benefitting from the current spending spree, as US consumers shift from leisure-related services to discretionary goods.
The US furniture market is expected to grow at a compounded annual growth rate of 4.3% from 2020 to 2023, driven by an uptick in the US homeownership.
Consumer spending also increased by 5.6% in June, driven by the US government financial aid of nearly US$2.8 trillion (RM11.62 trillion) aimed at mitigating the impact of the Covid-19 pandemic.
Exporters will also gain from favourable foreign-exchange rates, PublicInvest Research said, as the appeal of Malaysian furniture grows in tandem with the depreciating ringgit against the US dollar.
“We estimate that for every 1% drop in the ringgit, earnings for furniture stocks under our coverage would increase by approximately 0.8%,” the firm said.
Low rubberwood prices, due to the raw materials export ban imposed by the government in 2017, are also anticipated to boost the companies’ margins.
Before the ban, rubberwood sawn timber exports to China and Vietnam were estimated to be worth RM200 million to RM300 million annually, leading to a shortage in domestic supply and causing raw material prices to surge to RM2,300 per tonne from RM1,600 per tonne previously.
Since the ban was implemented, rubberwood prices have stabilised between RM1,600 and RM1,700, providing the industry with sufficient supply.
PublicInvest Research said furniture stocks are poised to record annual earnings growth of 37% and 20% for the financial year 2021 (FY21) and FY22 respectively.
It valued furniture stocks at 10 times to 15 times FY21 earnings per share, translating to price earnings-to-growth of 0.14 to 0.57 times.
“The continued increase in furniture spending on the back of greater disposable income among the middle-class worldwide and housing starts is likely to benefit Homeritz and Wegmans.
“Therefore, we are initiating coverage on the furniture sector with an ‘Overweight’ recommendation,” it said.
The firm has an ‘Outperform’ recommendation on Poh Huat with a target price (TP) of RM1.80 as it believes Poh Huat’s growth will be supported by higher furniture sales to the US.
Homeritz received an ‘Outperform’ call with a TP of 93 sen, while Wegmans received an ‘Outperform’ recommendation with a TP of 40 sen in light of its new plant that will double its current production capacity.