BCT Asia advisory

3Q FYE JUN 2019 RESULTS REPORT 29 May 2019

Name of PLC: Latitude Tree Holdings Berhad (LTHB) PLC Website: www.lattree.com
Business Summary : Manufacturing of wooden furniture products and components
Top Three Shareholders: Lin family 36.9%
Yek Siew Liong 15.1%
Samarang Ucits - Samarang Asian Prosperity 7.9%
Market / Sector: Consumer Stock Code: 7006
Bloomberg Ticker: LAT:MK
Market Capitalisation: RM 377.1m Recommendation: BUY
Target Price: RM 5.50 Expected Capital Gain: 41.4%
Expected Div Yield: 1.5%
Current Price: RM 3.89 Expected Total Return: 42.9%

Analyst: Lim Boon Ngee | Tel: +603 2163 3200; Email: bnlim@bcta.com.my

Key Stock Statistics 2017 2018 2019F 2020F 1. 3Q FY19 Results Highlight
EPS (sen) 71.0 12.5 47.1 55.1
P/E (x) 5.5 31.2 8.3 7.1 3Q FY19 3Q FY18 Chg
EPS ex-EI (sen) 71.0 26.8 47.1 55.1
RMm RMm %
P/E ex-EI (x) 5.5 14.5 8.3 7.1
Net Dividend/Share (sen) 12.0 6.0 12.0 12.0 Revenue 152.04 164.50 (7.6)
NTA/Share (RM) 5.77 5.63 5.98 6.41 Operating Profit (0.69) 1.16 n.m.
Book Value/Share (RM) 5.77 5.63 5.98 6.41 Finance cost (1.03) (0.80) 29.1
Issued Capital (mil shares) 97.2 96.9 96.9 96.9 Pre-tax Profit (1.72) 0.36 n.m.
52-weeks Share Price Range (RM) 3.00 - 4.16 Net Profit (2.07) 2.40 n.m.
Estimated free float 24% Operating Margin (%) (0.5) 0.7
Average volume (shares) 6,040 Pre-tax Margin (%) (1.1) 0.2
Net-Margin (%) (1.4) 1.5
Per Share Data 2017 2018 2019F 2020F
Year-end 30 Jun
Book Value/Share (RM) 5.77 5.63 5.98 6.41 • Turnover was slightly lower in 3QFY19 at
Operating CF/Share (sen) 47.5 13.4 79.1 94.3 RM152.04m due to lower contribution from its
EPS (sen) 71.0 12.5 47.1 55.1 Vietnam and Thailand operations.
Net Dividend/Share (sen) 12.0 6.0 12.0 12.0
P/E (x) 5.5 31.2 8.3 7.1 • However, it recorded a loss before tax of
P/Cash Flow (x) 8.2 29.1 4.9 4.1 RM1.72m in 3QFY19 as compared with a small
P/Book Value (x) 0.7 0.7 0.7 0.6 PBT of RM0.36m in 3QFY18.
Dividend Yield (%) 3.1 1.5 3.1 3.1
Payout Ratio (%) 16.9 48.2 25.5 21.8 • 3Q turnover performance is seasonally the
ROE (%) 13.2 4.7 8.1 8.9 lowest of its financial year due to the long festive
Net Gearing (%) (26.7) (24.2) (29.8) (32.6) holidays. Demand for furniture products in the
US normally slows down after Christmas and
P&L Analysis (RM mil) 2017 2018 2019F 2020F New Year holidays.
Revenue 786.02 752.83 781.19 824.69
EBITDA 109.36 53.92 74.92 85.96
• Net loss amounted to RM2.07m in 3QFY19 as
Depreciation & amort (20.11) (17.95) (18.05) (20.07)
compared with a net profit of RM2.40m in
Net interest income (0.91) (1.25) (1.14) (0.79)
EI * - (13.95) - -
3QFY18, which benefited from a reversal of
Pre-tax Profit 88.35 20.78 55.73 65.10
over-provision of tax expense.
Net Profit 69.07 12.08 45.70 53.38
EBITDA Margin (%) 13.9 7.2 9.6 10.4
Pre-tax Margin (%) 11.2 2.8 7.1 7.9
Net-Margin (%) 8.8 1.6 5.8 6.5
* Fire incident

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• In 3QFY19, turnover from Malaysia operations (furniture making operation, upstream sawn rubberwood
and panel lamination board factories) was flat at RM33.12m. It recorded a slightly higher pretax loss of
RM0.47m (3QFY19) as compared with RM0.28m (3QFY18).

• Due to delayed shipment of furniture products to the US as requested by US buyers in response to the
high inventory level, turnover at its Vietnam operations declined by 7.9% to RM111.91m in 3QFY19.
Coupled with the fewer production days in Jan-Mar period, higher sales of lower-margin products and
impact of minimum wage increase beginning 1-Jan-19, its Vietnam operations recorded a pretax loss of
RM0.71m (3QFY19) from a PBT of RM4.29m (3QFY18).

9M FY19 Results Highlight

9M FY19 9M FY18 Chg

RMm RMm %
Revenue 570.71 578.11 (1.3)
Operating Profit 37.26 29.71 25.4
Finance cost (2.88) (2.32) 23.9
EI
Pre-tax Profit 34.38 27.38 25.5
Net Profit 27.93 25.49 9.6
Operating Margin (%) 6.5 5.1
Pre-tax Margin (%) 6.0 4.7
Net-Margin (%) 4.9 4.4

• While group turnover was flat at RM570.71m in 9MFY19, PBT increased by 25.5% to RM34.38m. This
was due to higher productivity across all operating plants, better product mix and net forex gain.

2. Earnings Outlook

• LTHB is involved in the manufacturing of wooden furniture products and components, in particular high
quality rubberwood furniture targeted for the export markets. About 99% of its revenue is derived from
export markets, primarily the US, Canada, Europe, South Africa, Australia and the Middle East.

• We expect profit to recover in 4QFY19 from a seasonally weak 3Q. The improved profitability will be
underpinned by rising production output, stronger USD vs MYR and stable sawn rubberwood price. In
addition, LTHB is also poised to benefit from alternative sourcing by US buyers in view of the US-China
trade war.

• Longer-term, there is no planned capacity expansion for its furniture-making operations. The focus is to
optimise the production run-rate for better economies of scale and better profitability. The planned
expansion is on a new upholstery line and panel lamination board. The first upholstery line is expected to
be commissioned in Jul-19 with a monthly capacity of USD1.0m/mth. The second upholstery line will be
commissioned in Jul-20 with a similar capacity of USD1.0m/mth.

• For its non-furniture division, the current three production lines of panel board lamination are at optimum
utilisation rate. LTHB plans to add one more line in 1QFY20 to increase its capacity from RM3m/mth
(FY19) to RM4.0m/mth (FY20) with an investment of RM1m.

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3. Valuation and Recommendation

• On an annualised basis, 9MFY19’s net profit is below our earnings forecast for FY19. Seasonally, LTHB
usually record better sales in 1H of its financial year. 3Q is its slowest quarter due to the long festive
holidays and slower demand for furniture in US.

• We have reduced our earnings forecast by 10% to account for a slightly weaker performance of its
Vietnam operations. However, we are maintaining our BUY recommendation for its unique value
proposition in terms of a sizeable integrated operation and its attractive valuations.

• The stock is also currently trading below its book value of RM5.90 as at 3QFY19. It has a strong balance
sheet position with net cash of RM1.28/share. The stock is currently trading at P/E of 8.3x and 7.1x for
FY19 and FY20.

Share price chart of LTHB

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Disclosures/Disclaimer

Investment ratings:
Buy (generally >10% upside over the next 12 months)
Hold (generally negative 10% downside to positive 10% upside over the next 12 months)
Sell (generally >10% downside over the next 12 months)

This report has been prepared by BCT Asia Advisory Sdn Bhd pursuant to the Mid and Small Cap Research Scheme
(“MidS”) administered by Bursa Malaysia Berhad. This report has been produced independent of any influence
from Bursa Malaysia Berhad or the subject company. Bursa Malaysia Berhad and its group of companies disclaim
any and all liability, howsoever arising, out of or in relation to the administration of MidS and/or this report.

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