Malaysian furniture makers return to growth path
The outlook for the Malaysian furniture industry is positive this year, although it continues to face lingering challenges, according to research analysts.
The overall bullish outlook is due to a number of factors, including the easing of movement restrictions, which are helping furniture makers get back to business and improving their supply chain issues.
Then there is also strong demand from the North America region, driven by work-from-home arrangements and trade diversion from the US-China trade war.
However, challenges such as high raw material costs, continued shortage of foreign labor and concerns over labor practices in the manufacturing sector continue to cloud the outlook for the industry, according to Hong Leong Investment Bank. Research (HLIB Research).
Additionally, due to severe flooding in parts of Peninsular Malaysia in mid-December 2021, the cost of rubberwood may increase in the short term due to temporary pressure on supply caused by difficulty in harvesting. timber logs as well as the difficulty of transporting timber. wood logs to customers.
“On the supply side, we understand that the flooding impacted rubberwood delivery for a week after the event, but has since started to normalize,” says HLIB Research.
The research unit also notes that while flood-affected households will likely need to replace damaged furniture, this will only have a marginal effect on the furniture companies it covers (Evergreen Fibreboard BhdHomer Corp Bhd, Lii Hen Industries Bhd and Heveaboard Bhd.).
Indeed, these companies are export-oriented and make less than 5% of their sales on the local market.
A slight increase in local market sales could be expected for Lii Hen and HeveaBoard, as they have a small local presence through e-commerce channels.
The research unit notes that the country’s wooden furniture export value in the first 10 months of 2021 declined by 2.8% year-on-year to RM8.15 billion, owing to the long shutdown of furniture industry production from June to mid-September. year due to movement restrictions.
The United States continues to be the largest export market, accounting for 62.8% of total export value.
Regarding high raw material costs, HLIB Research points out that the main raw materials (rubber wood, glue, steel, foam, leather and packaging materials) were on an upward trend since the fourth quarter of 2020.
“The cost of glue in particular has seen a sharp increase mainly due to the rise in the price of crude oil as well as the rise in the price of urea as the demand for oil palm fertilizer increases,” indicates the report.
Moreover, despite having idle production capacity in their factories, furniture companies are unable to increase their productivity due to the production bottleneck caused by a labor shortage.
“If the influx of foreign labor materializes, it would give a boost to the furniture industry and be a major catalyst in driving profit growth,” HLIB Research believes.
Meanwhile, Evergreen’s regional production base is helping to mitigate the impact of the Malaysian production shutdown, as it was able to divert some of its MDF orders from Malaysia to Thailand. .
Evergreen is also benefiting from an up cycle in the panel market, supported by growing demand from furniture manufacturers in Malaysia and Indonesia as well as increased export demand from the Middle East.
The research unit points out that Evergreen’s integrated operations, from upstream to downstream products, allow it to be well positioned to take advantage of the current up cycle of the panel market as well as the growth of the wood industry. furniture.
Homeritz’s position as an original design manufacturing (ODM) manufacturer enables it to withstand cost pressures, earn a better margin and retain customers, he says.
Homeritz is an integrated designer, manufacturer and exporter of a full range of upholstered home furniture.
HLIB Research also notes that Homeritz, Lii Hen and HeveaBoard are net cash companies.
“Covid-19 has reminded us that having a good cash reserve is helpful in building financial resilience by surviving a business downturn,” he says, adding that Homeritz has a net cash position of 91 RM.8 million or net cash per share of 22 sen.
HLIB Research is also positive on HeveaBoard due to an increase in demand from the Japanese market for its particleboard, the group’s reorientation towards the production of higher-margin panels, the potential increase in the capacity of ready-to-assemble (RTA) furniture from overseas labor input, encouraging growth in RTA furniture sales to e-commerce vendors, and increasing capacity in its mushroom growing segment.
“Furthermore, we expect the current high cost of rubberwood and glue to decline from the first quarter of 2022 as weather conditions improve and urea prices stabilize.
“We also expect HeveaBoard to benefit from a lower raw material cost environment, as it generally does not adjust its selling price frequently, leading to increased margins,” he said. .
As for Poh Huat Resources Holdings BhdTA Securities Research is optimistic about the group’s prospects as it has finally resumed full operations following the easing of movement restrictions in Malaysia and Vietnam.
In addition to this, Poh Huat is currently supported by firm orders for delivery until April 2022.
According to Poh Huat management, U.S. demand for furniture products remains strong, thanks to trade diversion from the ongoing U.S.-China trade war.
According to trade data from the United States Census Bureau, US furniture imports from China have steadily declined while Malaysia and Vietnam are gaining market share.
In addition, Poh Huat management had indicated that it had revised its average selling prices upwards to pass on the higher cost of materials to customers.
In terms of production cost, the prices of raw materials such as particle board have increased due to strong demand from furniture players.
“The group had made a lot of purchases of advanced raw materials in 2021 in anticipation of a further increase in the cost of materials. In terms of wages, operations in Malaysia and Vietnam are expected to remain stable,” says TA Securities Research.
Meanwhile, workers at Poh Huat in Malaysia are expected to move into a new hostel by the first half of this year. The group has also recently completed a new showroom in Serenia City, Selangor.
Poh Huat aims to allocate up to RM10 million annually for machinery upgrades and automation to further improve its productivity.
Regarding Wegmans Holdings Bhd, PublicInvest Research expects a strong recovery in the group’s profits in the fourth quarter of 2021, given the resumption of its production activities.
Wegmans’ growth will be driven by improved economies of scale, a strong backlog and strong demand, particularly from the North America region.
“We believe that during the temporary suspension there were no order cancellations and pending orders were stretched to May 2022,” it says.
While rising raw material costs will have a negative impact on Wegmans’ margins, the group plans to mitigate this impact by gradually increasing its selling prices.