Some Good Furniture Companies in Bursa kcchongnz

“I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” ―Warren Buffett


About a year ago, I did an analysis of some furniture design and making companies listed in Bursa basing on the principle of the Magic Formula Investing Strategy as shown in the appended link here:
http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/40360.jsp
Since then, all these furniture companies have been doing quite well. Most of them have their profit increased for the last one year by more than 35% for the past one year. Table 2 in the appendix shows their trailing twelve months financial performance as at 30^th September 2014.
The share price of those furniture companies have also increased by huge amount ranging from 40% of Homeritz, to 98% of Latitude. For the same period, the broad market KLCI dropped by about 5%. Those who have invested in some of these furniture companies should be laughing all the way to the banks. Table 1 below shows the increase of share price of those companies in the last one year.
Table 1: Share price increase of some furniture companies

Company	Homeriz	Lii Hen	Latitude	Hevea	Poh Huat
Price 8/12/13	0.575	1.65	1.81	0.950	0.910
20/12/2014	0.805	2.72	3.58	1.60	1.31
Gain	40%	65%	98%	68%	44%

The question is, are they still worth investing, and if so which one is a better buy?
For value investors, the answer to the above questions are straight forward. The question lies on a combination of which has the best business, and which  business is offering the best price.
In this article, we will first deal with how to identify which is a better furniture company. We will deal with the price issue in the next chapter.

Profitability Analysis
Profit Margins
Table 2 in the appendix shows their trailing twelve months financial performance as at 30^th September 2014. Latitude has the highest revenue and net profit of RM650m and RM62.6m respectively, whereas Tafi is the smallest furniture company with the lowest revenue and net profit of RM30.8m and RM1.9m respectively.
The first step to identify which appears to be a better company is its margins.

Figure 1 above shows that Homeritz excels in profitability by a wide margin. Its gross margin of 43% is way above the rest, all of which are below 20%.  This is due to its different business model in its light asset model in designing and manufacturing upholstered home furniture such as leather and fabric-based sofas, dining chairs, bed frames etc. whereas the rest are mostly manufacturing of wood-based furniture.
In the more important profitability measure in operating margin, Homeritz also has the highest operating margin of 20%, trailing way behind by the second contender Latitude Tree of 11.2%. The rest have their operating margin of less than 10%.
 Homeritz is the only one which has a double digit net profit margin. It is close to 20%. Three other companies have their net profit margin above the benchmark of 6.4%; they are Latitude (9.6%), Hevea (7.6%), and Eurospan (7.1%).

Profitability ratios
It is important to measure a company’s ability to generate earnings relative to the amount of money invested. A company making a profit of $15m a year using $100m capital is far better than one earning $50m by utilizing $1 billion in assets. The former returns 15% while the latter only 5%.


The high net profit margin of Homeritz boost up its return on assets (ROA) to a high 0f 21%. Its  return of equity (ROE) and return on invested capital (ROIC) are also the highest at 24% and 42% respectively. Latitude Tree did well too with ROA, ROE and ROIC of 12.5%, 19% and 23.6% respectively. Two other companies performed well too with ROE well above their cost of equity, Lii Hen at 15.4% and Poh Huat at 13.8%, while Hevea barely meets its cost of equity at 12%.

Ranking in Goodness
With the size of the companies, their past year profitability and efficiencies, I would rank the companies from the best according to the following order:

1. Homeritz
2. Latitude
3. Lii Hen
4. Poh Huat
5. Hevea
6. Eurospan
7. Tafi

Conclusions
Most of the furniture companies mentioned above with the exception of the last two, Eurospan and Tafi, are doing very well recently in their business with high ROE and ROIC. Homeritz appears to be the best company with the highest margins, ROE and ROIC and its asset-light model. Latitude performed extremely well too with its high volume and high expected growth of its business. It  also has very attractive margins, ROE and ROIC way above the bench marks.
I have given my opinion of the ranking of the companies in term of their goodness. What is yours?
A good company doesn’t necessary to be a better investment, provided the price is right, and vice verse. We will explore the price issue in the next chapter.

For enquiry, please email ckc13invest@gmail.com

KC Chong (21^st December 2014)

Appendix

Table 2: Revenue and net profit of furniture companies

Company	Homeriz	Latitude	Lii Hen	Poh Huat	Hevea	Eurospan	Tafi
Revenue	127176	649701	378813	370394	412383	63237	30772
Gross Profit	54381	106126	57340	65392	63127	12656	4085
EBIT	25473	72983	33940	27097	37146	5948	1519
Net profit	24303	62632	24319	22852	31187	4486	1933