SHH Resources Holdings Bhd
(SHH) manufactures high quality wood based furniture which comprise of
bedroom suites, dining suites, buffet and hutches, entertainment sets,
occasional items, home office furniture and armoires. The Group operates
in Malaysia, exporting about 80% to 90% of its products to USA in
FY2015.Substantial shareholders as at 6 October 2015:
- Dato’ Teo Wee Cheng (24.41%) – Director
- Puncak Intan Sdn Bhd (9.66%)
- Dato’ Teo Chan Huat (4.25%) – Director
| Valuation | FULLY VALUED |
|---|---|
| Current price | RM 2.27 |
| Shares outstanding (approx.) | 49,997,500 |
| Market cap | RM 113.5 million |
| Fair value | RM 2.85 |
| Margin of safety | 20.4% |
HIGHLIGHTS
- Potential M&A with HeveaBoard in FY2016
- Beneficiary of strong USD
- Healthy balance sheet and cash flows
ANALYSIS
Financial Ratios @ Reuters: SHHR.KL
Please note that I have computed all
ratios reported below from original sources unless stated otherwise. For
other various ratios, please refer to Reuters.
Potential synergistic M&As to accelerate growth
It was reported last year that SHH was looking for potential M&As to expand its product portfolio and production capacity. HeveaBoard (HEVEA) was a potential candidate for a M&A deal with SHH. SHH and HEVEA were in talks of a potential merger
last year, and they hope to arrive at a collaboration in FY2016. A
successful deal should offer SHH shareholders a lucrative return in
dividends and/or HEVEA shares.
On the other hand, SHH management has also been searching for smaller, non-listed companies for possible M&As opportunities. While
the former merger is a faster and more aggressive method to boost gains
in the short term, a M&A deal can create more value for long-term
shareholders. According to the executive deputy chairman, Mr Ling Hee
Keat, SHH has an increased demand for its furniture and a M&A would
be the fastest way to increase production capacity. SHH is currently
operating at a 90% utilization rate.
Export oriented business with favorable forex rates
SHH exports 80% to 90% of its products to USA, thus being a beneficiary of strengthening USD.
Source: http://www.investing.com
Strengthening USD has
been the fundamental reason for the exceptional results obtained by SHH
for the past few quarters. Profit margin have skyrocket, but dragged
down by short term hedging policies. Note that the currency derivatives
expire in January 2016. Referring to the chart above and excluding
gain/loss effects from derivatives;
| Quarter | Profit margin | Change | Avg. USD/MYR rate | Change |
| FY2015Q4 | 6.2% | – | 3.6638 | – |
| FY2016Q1 | 11.8% | +5.6% | 3.9751 | +8.5% |
| FY2016Q2 | 16.8%? | +5.0%? | 4.2871 | +7.8% |
A simple forecast above
indicates that profit margins are expected to improve significantly for
the upcoming quarter and for the year FY2016.
Healthy balance sheet and cash flows
SHH is a net cash company
with positive FCF for the past 4 consecutive years. As at 30 September
2015, SHH holds cash amounting RM 32.46 million (RM 0.65 per share).
SHH’s significant excess cash should safely support future dividend
payouts in FY2016 despite a M&A with a smaller firm. The management hopes to issue a 10 cent dividend for FY2016, which translates to a decent 4.4% yield.
In FY2015, SHH managed a cash conversion cycle of 72.0 days in FY2015,
which should improve as the company increase its operational
productivity to cater for robust demand. By end of FY2016, SHH will be a
zero-debt company if the Group does not refinance its borrowings.
Labor intensive production affected by minimum wage policy
The recent minimum wage policy in the
Budget 2016 Malaysia is expected to impact profit margins. However,
according to Mr Ling’s projections, margins are expected to deteriorate
2% in a worst case scenario, stating that overheads make up 20% of the
company’s operating expenses.
VALUATION
Fair value of RM 2.85 based on a 10-Y DCF
valuation assuming; (i) 2% supernormal growth (ii) 8% required return
(iii) 1% terminal growth.
Thank you.
Shaun Loong
Disclosure: At time of publication, I own stocks in SHH. This article was edited on 11 March 2016.
SHH (7412) - SHH, M&A Talks in Progress
https://megamicrocaps.wordpress.com/2016/01/16/shh-ma-talks-in-progress/
