Koda Limited - SAC Capital 2022-08-30: Macro Headwinds Ahead


Koda Limited - Macro Headwinds Ahead

  • Koda’s FY22 results are in line with our estimates. FY22 revenue (US$79m) and earnings (US$ 5.7m) have declined 4% and 38% respectively. Sales to its ODM customers fell 4% as production was disrupted by COVID restrictions. Similarly, sales at its Commune outlets (-5%) were also hit by lockdown measures in China. Gross margin fell 2.3pp to 30.5% on lower utilisation and higher material costs.
  • Koda incurred US$2.9m damages caused by a fire accident at its Vietnam factory which contributed to the sharp drop in net profit. Adjusted for one-off items of US$0.7m (i.e. provision and compensation relating to the fire incident and govt grant), net profit would be US$6.4m.

The Group faces weaknesses in its main end customer markets

  • Koda (SGX:BJZ) faces weaknesses in its main end customer markets, North America and China. Customers from North America region accounts for 80% of its ODM sales while ~90-95% of its retail footprint (i.e. no of stores) are in China. Furniture demand is expected to soften in both countries.
    • In US, new home sale units have declined 38% year-to-date. 30-year fixed mortgage rate has also soared to 5.55% from 2.87% a year ago. Given FED’s hawkish stance on interest rates, rising mortgage rate further erodes buyers’ affordability. Koda’s immediate concern lies with inventory glut issues that US retailers are facing. US June retail inventories for furniture has grown 14% year-to-date. Inventories to sales ratio also rose to 1.69x compared to 1.53x in Jan 22. As such, we expect to see a decline in orders placed to Koda as their customers focus on clearing their excess inventories first.
    • Separately, furniture sales in China are affected by its property market crisis and lockdowns which have dampened consumer sentiment. According to CRIC, July sales in China’s top 100 developers slumped 39.7% y-o-y. Commune (wholly owned by Koda) is delaying its expansion plan to open 100 stores in China and pivoting to markets in other countries (e.g. India and South Korea) to reduce concentration risk. We expect sales at its local Commune outlets in 1H23 to do better from year-end festive sales. The start of GST hike on 1 Jan 2023 could also bring forward purchases of higher-value.

Koda - Valuation & Recommendation

Lim Shu Rong SAC Capital Research | https://www.saccapital.com.sg/ 2022-08-30
SGX Stock Analyst Report BUY MAINTAIN BUY 0.64 DOWN 1.140