Wegmans earnings to grow on capacity expansion, exports

by ASILA JALIL / pic by TMR FILE

WEGMANS Holdings Bhd could see a surge in earnings for the financial year 2021 (FY21) and FY22 driven by capacity expansion which will double its manufacturing capacity.

Although its earnings are set to decline by 10% year-on-year (YoY) this year dragged by lower export volume due to the Covid-19 pandemic, Wegmans’ earnings are expected to increase by 97% and 23% respectively in FY21 and FY22 following a gradual recovery in the global economy, Public Investment Bank Bhd noted in a report recently.

In 2016, the group purchased 21 acres (8.5ha) of land in Muar with plans to develop the land in three phases. The first phase utilised 10 acres to construct a new factory with similar production capacity as the existing plant.

This new facility includes a new headquarters, showroom and hostel for workers. The new factory is expected to double the annual production capacity to 380,000 tables and 960,000 chairs to support Wegmans’ future growth, the investment bank said.

Wegmans’ new facility is currently operating at a 50% utilisation rate and the company has installed new machineries to increase automation in its effort to reduce reliance on foreign labour.

It now only requires 400 workers at the new facility compared to 500 workers for the existing operations.

The Johor-based company has earmarked RM10 million as capital expenditure for its Phase 2 expansion which includes the construction of a new warehouse and finishing line mainly for clients from the US, the report added. It is scheduled for completion by year-end.

The ongoing trade war between US and China has benefitted the company as exports to the US grew by 13% YoY in 2019 to RM38.1 million from RM33.6 million the previous year.

“A huge part of its sales (99%) are transacted in US dollars while its main raw material is sourced locally and transacted in ringgit. With the greenback expected to remain around the current levels, +/-5%, translation gains should continue to remain steady,” Public Investment Bank stated.

Wegmans is focused on its own design manufacturing, thus providing the company with a competitive edge against the industry peers who mainly focus on original equipment manufacturing.

The group also aims to achieve 20% of revenue from the China market in three years from the current 5%.

“Cheaper raw materials such as rubberwood and favourable foreign-exchange rate will likely benefit Wegmans. Based on our sensitivity analysis, for every 1% change in the dollar to ringgit, there will be a 0.9% impact on earnings,” said the report.

The investment bank has initiated its coverage on Wegmans with an ‘Outperform’ call with a target price of 40 sen, pegging it to a 15 times FY21 earnings per share (EPS).

The firm believes the higher earnings multiple “is justifiable” because of Wegmans’ competitive edge and higher profit margins against its peers.

“With the additional capacity coming in, we are positive Wegmans will be able to diversify its revenue stream via market expansion and new product offerings,” it added.

In a separate report, the bank recently stated that Malaysian furniture makers are set to see a surge in growth next year as furniture demand gets a trade diversion boost amid the US-China trade war.

It stated that furniture stocks are poised to record annual earnings growth of between 37% and 20% for FY21 and FY22 respectively and valued furniture stocks at 10 times to 15 times FY21 EPS, translating to price earnings-to-growth of 0.14 times to 0.57 times.

Wegmans’ shares rose 45.7% in the past month while shares of other industry players such as Homeritz Corp Bhd and Poh Huat Resources Holdings Bhd increased by 24.4% and 5.1% respectively.