|Current Price||RM 5.00|
|Target Price||RM 5.90|
|Market Cap||RM 486m (as of 5/11/16)|
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.
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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