SGX Stock Targets :: Your One Stop Analyst Reports Blog

Increasing cost of leather. The bulk of the cost increase was attributed to leather, a key raw material, which constitutes 55% of MWH's cost of goods. Global leather prices, which rose 25% YoY in FY07, are not expected to ease in the near future, given the strong demand for leather from the shoe and automobile industries in China. To tackle this, MWH has increased its inventory of leather. As a longer-term measure, MWH has sought to raise the average selling price of its products by shifting its production towards higher-end micro-fabric sofas. The gradual step-up in selling price will serve to stabilize MWH's margins in FY08 and beyond. MWH's net profit margin fell from 15.6% in FY06 to 10.6% in FY07. We expect net profit margin to hold at around 9.0% in FY08.

Expansion of capacity. Margin squeeze aside, the demand for MWH's sofas remains strong. In FY07, MWH completed phase 1 of its expansion plans, which ramped up its production capacity by 49% to 153,000 sets of sofas per annum. Running at full capacity now, MWH is in the midst of its phase 2 expansion, targeted to be completed by August 2007, which will increase capacity by another 98% to 303,000 sets of sofas per annum. Given that the phase 2 expansion is expected to be fully operational in 2H08, we project an annual output of 191,000 sets of sofas in FY08. This brings our projected revenue to HK$1.2b for FY08, a 44.5% YoY increase from FY07, and our projected net profit to HK$111.1m, a 22.5% YoY increase.

Maintain BUY. As we expect MWH to continue to face challenges such as increasing costs of leather and labour and a strengthening yuan against the USD, we have taken these factors into consideration in our earnings projections and valuation. We have lowered our fair value estimate from S$0.615 previously to S$0.58 based on 8x blended FY08/09 PER. At current price of S$0.505, we are maintaining our BUY rating.