Wegmans the Carpenter NOT RATED. Ace Market Listing

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1 I P O Monday, February 19, 2018 FBMKLCI: 1, Sector: Consumer THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Wegmans Holdings Berhad TP: RM0.31 (+6.9%) Wegmans the Carpenter Ace Market Listing NOT RATED Ooi Beng Hooi Tel: benghooi@ta.com.my Background Wegmans is a home furniture manufacturer. The company is principally involved in the design, manufacture and sale of home furniture products. IPO Statistic The IPO entails a public issue of 100.0mn new ordinary shares, and an offer for sale of up to 50.0mn shares by the offeror to institutional and identified investors, at an IPO price of RM0.29/share. Public issue: 25.0mn new shares for application by the Malaysian public; 15.0mn new shares for application by eligible persons; 10.0mn new shares by way of private placement to institutional and identified investors. 50.0mn new shares by way of private placement to identified Bumiputera investors approved by MITI. Main Competitive Advantages 1. Wide selection of designs for home furniture through continuous product design and development activities; and 2. Established business relationship. Valuation At IPO price of RM0.29/share, Wegmans is priced at a trailing PER of 9.5x FY16 earnings. We value the company at 11x CY18 EPS, arriving at a fair value of RM0.31/share. Earnings Summary (RM mn) FYE Dec FY15 FY16 FY17F FY18F FY19F R evenue Gros s profit E BITDA E BITDA m a rg in (% ) Opera ting profit P BT Net profit E P S * (s en) P E R ^ Gros s dividend (s en) na na na Dividend yield^ na na na R OE (% ) Note: *based on enlarged share base of 500mn, ^ based on IPO price of RM0.29/share Share Information Listing Ace Market Enlarged Share Capital (mn) Market RM0.25 (RM mn) Issue price (RM) 0.29 Oversubscription rate N/A Estimated free float (%) 30.0 Tentative listing date 6 March 2018 Tentative Listing Dates Event Tentative Date Opening of the IPO 13 February 2018 Closing of the IPO 22 February 2018 Balloting of Applications 26 February 2018 Allotment of Shares 2 March 2018 Listing 6 March 2018 Ratio & Analysis NTA per share (post IPO) (sen) 11.5 Price to NTA (x) 2.5 Proforma ROE (%) 67.4 Proforma ROA (%) 31.1 Proforma Gearing (x) 0.21 Utilisation of Proceeds RM(mn) % Capex - New factories PPE Working capital Estimated listing expenses TOTAL Page 1 of 7

2 Business Overview Wegmans is a home furniture manufacturer. The company is principally involved in the design, manufacture and sale of home furniture products (see Appendix), which are targeted for the middle class consumers. Its products are mostly sold through wholesalers, retailers, chain stores and traders. Exhibit 1: Revenue Breakdown by Type of Furniture Products Source: Company, TA Research Exhibit 2: Geographical Revenue Breakdown Overseas FY16 Jan-SepFY17 Japan US Australia UK Singapore Saudi Arabia UAE China Thailand Poland New Zealand Canada Spain Greece Sweden Korea Algeria Others Local (Malaysia) Little Impact from Seasonality Patterns Generally, there are no significant seasonality patterns in the company s sales. Nevertheless, 1Q is usually slightly lower than the rest of the quarters due to the Chinese New Year holiday, thus affecting production and delivery schedule. Page 2 of 7

3 Exhibit 3: IPO Structure Public Issue Malaysian public Eligible persons Private placement to institutional and identified investors Private placement to Bumiputera investors approved by MITI Offer of Sale Placement to institutional and identified investors Source: Company, TA Securities 25.0mn new shares 15.0mn new shares 10.0mn new shares 50.0mn new shares 50.0mn vendor shares Utilisation of proceeds The estimated gross proceeds of RM29.0mn raised are expected to be utilised for the followings: Exhibit 4: Utilisation of proceeds Des cription Ca p e x Estimated timeframe for utilis ation from Date of Lis ting Amount (RM'mn) % of Total Gross Proceeds - Ne w f a ctorie s With in 2 y e ars Pu rch a se of PPE With in 2.5 y e a rs Workin g ca p ita l With in 2.5 y e a rs Estim a t e d list in g e xp e n se s With in 3 m on th s Total gros s proceeds Source: Company, TA Securities Competitive Advantages 1) From design to production Wegmans has the ability to produce furniture products from its own design, hence enabling the company to take control of the type of materials and colours used, and better manage production costs. Supported by a dedicated design team, a continuous flow of product design and development has allowed the company to produce a wide selection of designs for its living room furniture, dining room furniture and bedroom furniture. 2) Established business relationships The company has nurtured long-term business relationship with its major customers, most of which have been with the company for more than 5 years. Ensuring a sustainable supply, the company has also established long-term business relationships of more than 5 years with its major suppliers. These relationships has enabled Wegmans to maintain its overall competitive edge in the home furniture industry. Key Risks Relating to Business and Industry 1) Political, economic, legal or social conditions of target markets For the past 4 years, the company derived more than 90% of its revenue from export markets which include Japan, US, Australia and UK. Therefore, the company s financial performance would be affected by political, economic, legal or social conditions of its target markets. 2) Fluctuations in forex rates The company s revenue is largely denominated in USD. For FY16, 98.4% of its revenue was denominated in USD. Any significant change in the forex rate may affect the company s financial results. Page 3 of 7

4 3) Fluctuation in prices of raw materials Main raw materials used for its products are rubberwood and other woodbased materials such as veneer board and laminated boards, which made up about 51.5% and 53.3% of the company s total purchase for FY16 and Jan-Sep FY17 respectively. If there are significant increases in the costs of the main raw materials and the company is unable to pass on such incremental costs to customers, the company s financial performance may be negatively affected. 4) Dependence on foreign production workers The furniture industry is labour intensive and the total workforce is generally dominated by foreign workers. Any change in foreign worker policies, including minimum wage policy may result in difficulties for the company to maintain a sufficient foreign labour workforce, and this may disrupt its operation and adversely affect its financial performance. The direct labour cost make up about 25% to 30% of the company s cost of sales. Financial Highlights The revenue for FY15 jumped 68.0% to RM66.2mn as a result of higher sales volume as well as favourable forex rate derived from its export sales. For similar reasons, the company saw another leap in revenue by 29.3% to RM85.6mn in FY16. The net margin for FY15 surged 12.0%-pts to 19.6% mainly boosted by weakening of the RM against USD as well as better economies of scale arising from significant improvement in sales volume. Despite a stronger USD in FY16, the net margin for the year eased to 17.9% in FY16 due to discounts given to customers who repeated orders, along with higher cost of sales from partial outsourcing of production to third party subcontractors to meet the delivery deadlines of growing sales orders. With the above, the group reported net profit growths of 334.3% and 18.1% in FY15 and FY16 respectively. Exhibit 5: Financial performance Source: Company, TA Securities Page 4 of 7

5 Going forward, we forecast FY17 to FY19 revenues to stay range bound between RM84.5mn and RM89.2mn as its plants are running near full capacity. We expect the margins to decline slightly due to strengthening of RM against USD (our assumptions of RM4.0/USD for 2018 and 2019 vs. average of RM4.08/USD for 2016 and RM4.30/USD for 2017). Given the above, we forecast FY17 to FY19 net profits to be flattish, ranging between RM14.0mn and RM14.4mn. Future Plans and Business Strategies The group s future plans and business strategies are as follows: i) To increase production capacity The company plans to increase its production capacity by constructing new factories. The capacity expansion will be carried out in 3 phases. For Phase 1 of the expansion, the company will utilize approximately RM22m raised from the IPO proceeds. The additional capacity from the phase 1 expansion is expected to be ready for commercial operation in Phase 1 expansion will double its existing annual production capacity to approximately 960,000 units of chairs and 380,000 units of tables. ii) To further expand and diversify its customer base It plans to increase its marketing efforts by participating in international furniture trade exhibitions and events and source suitable sales agents to market its products by 1Q19. iii) To increase product range and develop new product designs It plans to increase its product range for living room and bedroom furniture, as well as to develop new product designs across all categories. It targets to release more than 50 new product designs every year. Outlook According to an independent market research report prepared by Smith Zander, which was enclosed in the IPO prospectus, the global home furniture import value is projected to grow from an estimated USD143.9bn in 2017 to USD152.9bn in 2019, at a CAGR of 3.1%. In the same report, the researcher expects the home furniture import values for Japan, US, Australia and UK i.e. the key target markets for Wegmans, to grow at CAGRs of 1.0%, 7.8%, 0.9% and 1.6% respectively. Given the gradual growth projected for key markets and coupled with the fact that Wegmans plant is running near full capacity, we expect tepid earnings growth for the company until the new capacity kicks off in Balance Sheet On a pro forma basis, post-listing, the balance sheet is expected to improve from a net debt position of RM15.6mn (net gearing level of 0.49x) to a net debt position of RM12.2mn (net gearing level of 0.21x). Dividend Policy The group does not have a fixed dividend policy at this juncture. Page 5 of 7

6 Earnings Forecast We expect FY17 and FY18 earnings to contract by 6.0% and 2.6% respectively before rebounding +2.5% in FY19. Our earnings projections are premised upon the following assumptions: Revenue to decline 1.3% in FY17 due to product mix with lower average selling price, coupled with temporary shortage in labour supply. Revenue should improve in FY18 and FY19, supported by higher sales volume; and Lower gross margins of 29.5%, 28.0% and 28.0% for FY17, FY18 and FY19% respectively, versus 30.1% achieved in FY16. Our softer margin assumption is in tandem with weaker RM4.0/USD assumed for FY18 and FY19. Valuation Assigning a target PE multiple of 11x on CY18 EPS to value Wegmans, the same target PE multiple we assigned to POHUAT, we arrive at a target price of RM0.31. This is considering: i) the company is a small-cap company listed in Ace Market; ii) potential growth from capacity expansion; iii) superior margins and ROE; iv) modest net debt position; and v) moderate growth rate in the furniture export market. Exhibit 6: Peer Comparison Company Share price Market cap FY17 net profit* FY18 net profit* PE (FY17) PE (FY18) Dividend yield (FY17) Dividend yield (FY18) Net cas h/ market cap (RM) (RMmn) (RMmn) (RMmn) (x) (x) (%) (%) (%)^ LATITUD na 5.6 na 3.0 na 38.2 LIIHE N P OHUAT HOME R IZ AVE R AGE WE GMANS na na na na na na (8.4) Note: * consensus' earnings ^ based on latest quarterly results Note: *based on the previous financial year; ^based on the latest quarterly financial results Source: Companies, TA Securities Page 6 of 7

7 APPENDIX Exhibit 7: Home Furniture Products Offerings Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. As of Monday, February 19, 2018, the analyst, Ooi Beng Hooi, who prepared this report, has interest in the following securities covered in this report: (a) nil Kaladher Govindan Head of Research TA SECURITIES HOLDINGS BERHAD (14948-M) A Participating Organisation of Bursa Malaysia Securities Berhad Menara TA One 22 Jalan P. Ramlee Kuala Lumpur Malaysia Tel: Fax: Page 7 of 7