MY ER Latitude Tree Holdings – Nov 16

Stock Code 7006.KL
Investment Rating BUY
Current  Price RM 5.00
Target Price RM 5.90
Estimated Return +18.10%
Market Cap RM 486m (as of 5/11/16)

Company Profile:
Core business operation is manufacturing of household furniture (such as Bedroom, Living Room and Dining Set). It also has PPE rental and investment holdings operations. Headquartered in Malaysia with major operations in Vietnam. Export-oriented with significant exposure with United States.

Investment Considerations:

1) One man’s ceiling is another man’s floor – The fall of MYR
The company has benefitted from the weaker MYR against major currencies, resulted in a massive amount of FX gains in the cash flow generation (RM10m in FY16 which represents 13.7% of the net income). Despite the significant operations in Vietnam, the majority of the revenue was contributed by the United States (93% of the revenue). However, with the uncertainty of the United States, economy after the election result and the home improvement goods are showing sign of slowdown might reflect challenging outlook. We have projected a moderate growth of 3.3% (compared to 9.9% historical CAGR). Operations strategically located in Vietnam will lower its production costs relative to Malaysia but exposes to geopolitical risk which might jeopardise the operations.

2) Net cash position with decent cash flow generating ability.
Currently, the company is supported by strong balance sheet with net cash position (RM 102m in FY16). Cash balance of RM183m is more than adequate to cover the total liabilities of RM181m. Cash flow generating ability as indicated by the Fund from Operation margin sustained at above 6%. However, the Capex/Sales ratio is quite volatile which fluctuates around 1% to 8%. Our cash flow projections assume Capex/Sales of 3.5% which, in absolute terms, is higher than the historical (on average). Although the revenue posted a robust growth, the decline in net profit was attributable to 1) higher tax expense and 2) lower other income. FY15’s net income was boosted by the recognition of unrealised FX gains of c. RM7m. Despite the decline, the company is able to show better costs control which may be attributable to favourable FX translation (higher top-line while the costs stay relatively flat). Gross profit margin increased from 16.6% to 17.7% in FY16. From peer comparable, it also shows that Latitude Tree is one of the best performers in terms of cash flow generation and profitability.

3) Attractive valuation suggested by DCF model and relative valuation.
We utilised DCF model and relative valuation and assigned 70% and 30% respectively. Currently, the Multiples of Latitude is trading at an undemanding level (one of the lowest in the industry). We believe that there is upside potential with its cash flow generating ability and its low multiples suggest there is scope for multiple expansion. The fair value according to our calculations and assumptions is RM5.90 with the implied upside of 18.10%.

Financial Summary FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Price to Earnings 5.93x 3.79x 5.30x 7.73x 6.99x
Price to Net Tangible Assets 0.28x 0.40x 0.95x 1.47x 1.05x
Price to FCF 2.54x 1.94x 3.99x 17.45x 7.68x
EV / EBITDA 2.64x 1.55x 2.69x 4.76x 3.50x
Net Profit Margin (in %) 2.85% 6.49% 9.88% 11.02% 9.46%
Free Cash Flow RM’m 22.9 47.6  73.1  34.5  66.2

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The opinions and views presented in this website and equity research reports are based on facts (which Yield Mountain believes to be reliable and correct) and subjective judgements. It is only for information purpose and does not consider the unique circumstances of the readers. It is not intended as an offer to buy or sell the securities discussed. All the information is based upon publicly available information. Whilst every effort is made to ensure the opinions and views are accurate, we are not auditors and do not independently verified every source used. Past performance is not necessarily an indicative of future performance and the contributors at Yield Mountain will not accept for any losses arising from information contained in this report. The contributors may form forward-looking views (projections and estimations) of the companies which may not necessarily be true. Market conditions and unforeseeable events may lead to materially different outcomes. Yield Mountain strongly recommends the readers to seek independent advice from their brokers to understand the investment risks arising from taking investment actions based on the Yield Mountain’s equity research. 

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