Koda Limited - SAC Capital 2021-09-01: Strongest Year For Koda


Koda Limited - Strongest Year For Koda

  • Koda Ltd (SGX:BJZ)'s FY2021 (ended 30 Jun 2021) results were ahead of our projections of revenue (+13%) and net profit (+36%). Revenue rose 36.9% y-o-y to US$82.6m, and net profit more than doubled to US$9.1m, led by export sales to OEM customers (+34.8%) and retail sales (+46.7%) under house brand Commune.
  • Koda's retail operations turned around with operating profit of US$1.2m, bolstered by strong sales in Singapore fuelled by WFH home refurbishment needs.
  • Commune are still on track with its plan to expand the number of stores in China to 100 by 2022. Its own flagship store is also expected to be open in Shanghai by end 2021. A higher store count will allow Commune to enjoy operating leverage in the long run.

US furniture demand growth intact

  • North America market represents 74.2% of Koda’s manufacturing segment. U.S. retail sales excluding auto and gasoline for July grew 10.9% y-o-y. Furniture and furnishing sector posted a 3.2% y-o-y increase and outgrew pre-pandemic sales level in July 2019 by 26.8% as consumers are still eager to turn their houses into homes. (Mastercard Spendingpulse)
  • Additionally, several companies including Facebook, Amazon and Alphabet have delayed their back to office arrangement until 2022 due to surge in Delta variant cases. Spending on homes are likely to sustain given the extended period to work remotely. WFH trend bodes well for Koda as this would imply higher orders coming from their customers which translates to higher sales.
  • Koda had registered a 34.8% y-o-y growth in its manufacturing segment and the segment makes up 80.7% of its total revenue. Gross margin measured at 32.8% for FY21. Comparing 1H21 and 2H21, the gross margin increased by 1.2 ppt due to improved factory efficiency thereby resulting in lower unit production cost per output.

COVID curbs in Vietnam and Malaysia could hurt output in 1H22

  • High COVID-19 cases had led to temporary suspension of Koda’s factory operations in both countries. Factory in Malaysia is closed for approximately 3 months since June while operations in Vietnam are temporarily suspended since late July.
  • In the meantime order shipments are fulfilled by drawing down on available inventories. However with production strictly limited and inventories may have been substantially consumed (US$7.3m of finished goods in inventories as of 30 June 2021 which represents 13% of FY21 COGS), the time to complete the orders will be dragged out and thus, negatively impacting delivery timeline.
  • Further delay on reopening of production lines in Vietnam and Malaysia could potentially cause a further dip in 1H22 sales. Both authorities have provided guidance on the conditions to resume operations.
    • For Malaysia, operating capacity will depend on workers full vaccination rates ranging form 60-100% while for Vietnam, factories may be allowed to operate at 70% capacity if all workers have received first dose of vaccination and at full capacity if workers registered full vaccination rates. Given the higher full vaccination rate in Malaysia, Koda is expecting to resume its operations in September and gradually resume full production given increasing higher full vaccination rate.
    • As for its Vietnam operations, Koda will follow up on implementation dates guided by the authority before progressively resuming their operations.
  • Given the depleted inventories, uncertainty brought about by virus resurgence and slow reopening of production lines, we expects sales in 1H22 to take a hit. Gross profit margin is also expected to fall, holding at about 32.2% due to increase unit production cost with higher fixed costs distributed across lower sales volume.

Factors impacting sales at Commune’s stores

  • Property curbs: China is determined to curb property speculations and cool property prices to make homes affordable. The authorities imposed more restrictive measures such as raising mortgage rates, temporarily halting land auctions in some major cities, and increased scrutiny of financing to developers, etc. Home sales in first tier cities and investment have since dropped. Thus, this is expected to reduce demand for home furniture. Currently, Commune has 75 stores in China.
  • Lockdown: In early August, China has instructed lockdown of various cities such as Nanjing, Zhangjiajie and Zhuzhou as COVID-19 cases spike due to Delta variant. Commercial activities are disrupted. While Commune stores in China are not directly affected as the stores are still open, retail sales took an indirect hit due to lower foot traffic as more employees work from home. Nevertheless, one mitigating factor is that the government has sped up its vaccination drives with mobile vaccination sites, free transportation, door-to-door visits etc. As of mid-August, China had administered more than 1.975 billion doses of COVID-19 vaccines. Hence, China’s quick and strict response to COVID-19 cases is likely to mitigate the spread faster and restart its activities earlier like how it did before in 2020.
  • Back to office arrangement: Singapore has also allowed up to 50% of employees to return to their workplace. There will be less of a need to renovate the homes anymore. This is expected to slow down retail sales for furniture in Singapore. Commune has enjoyed a boost in sales for its 4 stores in Singapore during the pandemic.

BUY at price target of S$1.00 (Unchanged).

Lim Shu Rong SAC Capital Research | Lam Wang Kwan SAC Capital | https://www.saccapital.com.sg/ 2021-09-01
SGX Stock Analyst Report BUY UPGRADE HOLD 1.000 SAME 1.000