Wegmans (WEGMANS, 0197), a furniture company that growing on and growing up

Recently listed in the ACE market in March 2018, Wegmans Holdings Bhd (WEGMANS, 0197) is a wood-based (mainly rubberwood) home furniture manufacturer, targeted for the medium-income level customers. Its products are sold both directly to customers and also through agents.

This holding company only has a single 100% owned subsidiary called Wegmans Furniture Industries Sdn Bhd which carries out the actual furniture designing, manufacturing and selling business.

If you are unfamiliar about this company, the 8 minutes corporate video below will give you a good idea about its background.

In its IPO, 100 million shares were placed out at the price of RM0.29 per share at the placement proportion as follow:

• 25% - Malaysian public
• 15% - Directors, employees, business partners, suppliers & customers
• 10% - Private placement to institutional and selected investors
• 50% - Private placement to identified bumiputera investors

Its IPO was well received with an over-subscription of 16.38 times. Its price closed at RM0.295 during the first trading day on 6 March 2018.

The proceeds from IPO were allotted as follow:

• RM11 million for construction of new factories
• RM11 million for purchase of new machineries and equipment
• RM3.5 million for working capital
• RM3.5 million for listing expenses

Therefore, it is pretty clear that the purpose of its IPO is for expansion and fuel for continuous growth.

The key historical milestones of WEGMANS is as below:

• 1994 - Wegmans Trading founded with a small factory on a piece of 2,000 sqft. rented land at Jeram Masjid, Muar, Johor, to produce and supply furniture parts for wooden dining chairs and sofas to local furniture manufacturers.
• 1997 - Production floor space expanded to 6,000 sqft.
• 1999 - Wegmans Furniture was established to replace Wegmans Trading, with an aim of becoming a furniture manufacturer and exporter.
• 2000 - Started to manufacture and sell dining tables and dining chairs.
• 2001 - Production floor space expanded to 14,000 sqft. Began to export products to customers in South Korea and Australia.
• 2002 - Started exporting to more countries including Belgium, Denmark, Finland, Germany, Greece, Netherlands, New Zealand, Saudi Arabia, Spain, Singapore, Sweden, United Arab Emirates and USA.
• 2003 - Widened product range to include living room furniture.
• 2004 - Production floor space expanded to 18,000 sqft.
• 2005 - Began spraying works in Block B (49,400 sqft). Widened product range to include bedroom furniture.
• 2006 - Factory Block A (55,952 sqft) started operation.
• 2009 - Total export markets to 44 countries.
• 2010 - Factory Block C (42,846 sqft) started operation.
• 2012 - Obtained ISO 9001 certification
• 2015 - Purchased 254,436 sqft land to build own factory for raw material storage and wood preparation. Will be operational soon in 2018 to takeover current facilities on a piece of land rented from Poh Huat (POHUAT, 7088).
• 2016 - Purchased 905,397 sqft land for production expansion.

Today, WEGMANS revenue is still heavily depend on dining room furniture. Its proportion of revenue contribution is as follow:

• 93.13% from dining room furniture
• 4.17% from living room furniture
• 1.67% from bedroom furniture
• 1.03% from others

Its major customers are:

• Nitori Co Ltd, Japan (17.73% revenue contribution)
• Super A-Mart Pty Ltd, Australia (10.22% revenue contribution)
• Home Retail Group (Hong Kong) Ltd, United Kingdom (5.64% revenue contribution)

Its major suppliers are:

• Chinfon Timber (7.03% of total purchases)
• Plymax Veneer Sdn Bhd (10.42% of total purchases)

Price and supply-demand situation of raw materials, particularly rubberwood, is a kind of risk that might affect the business and financial of WEGMANS. Anyhow, WEGMANS has not been hit with this kind of issue, as they maintain many years of good long-term relationship with suppliers.

99.03% of its revenue is derived from exports to over 70 countries around the world. Of which, there are 14 countries with consistent export orders, namely: Australia, Canada, Denmark, Estonia, France, Germany, Japan, Korea, Norway, Singapore, Spain, Sweden, United Kingdom (UK) and United States of America (USA).

The revenue contribution from export countries are as below:

 

Since WEGMANS is export oriented, it is exposed to foreign exchange risk. Every 5% change in USD/RM exchange risk will bring fluctuation of RM430,000 to its profit after tax. Since the USD is strengthening against most of the currencies including MYR over the past few months, this situation is expected to have positive effect to WEGMANS upcoming 2018 Q3 financial result to be announced in November 2018.

(USD/MYR chart generated from Bloomberg website)

 

WEGMANS develops and maintains its competitive strengths through:

• Own design and development
• Stringent QC
• Established business relationships

From these information, we can view that WEGMANS is able to maintain its bargaining power towards customers and suppliers, and able to sustain against threat of new entrance and threat of substitute products.

 

It is also able to maintain quite a sustainable competitive advantage.

 

 

WEGMANS currently has a staff strength of about 600, of which 84.22% are foreign workers.

 

The furniture industry is labour intensive, unless more automation is employed.

 

Any change in foreign worker policy in Malaysia or in the countries which the foreign workers are employed from, may result in difficulties for them to maintain a sufficient foreign labour workforce.

 

In addition, cost of hiring labour may increase in the future and they might not be able to pass on such increase in cost with corresponding increases in the prices of their products.

Furthermore, their future expansion plan requires a significant increase in labour to meet increased manufacturing activities.

 

There may also be disruption in the supply of foreign workers to Malaysia, which may delay them to hire new foreign workers in time after the expiry of the contracts of the existing foreign workers.

As a result, their business operations and financial performance may be materially and adversely affected. It is imperative for them to go for more automation and furthermore to embrace the Industry 4.0 revolution.

 

Other risks inherent in the furniture industry include fire hazards and disruption to electricity supply.

WEGMANS is led by 2 key senior management persons.

 

Mr. Keh Wee Kiet, 48, is its managing director who in charge of strategic planning and overseeing the manufacturing operations of the company. He has more than 24 years of hands-on experience in the furniture industry.
 

He is the main founder who built and grew the business from a sub-contractor to a reputable exporter, especially during the period when Mr. Collin Law was still a sleeping partner before he eventually joint as executive director in 2005.

 

Mr. Collin Law Kok Lim, 48, is its executive director who is currently responsible for overseeing their business development and Design and Development (D&D) departments.

 

He joined as the Executive Director in February 2005 to set up the sales and marketing department to secure customers directly so as to reduce the reliance on third party agents. In the same year, he was also instrumental in setting up the D&D team.
 

He keeps abreast with the latest market developments globally by participating in international furniture trade exhibitions and events.
 

WEGMANS practices a good corporate government by having different person as board chairman and managing director.

 

The chairman, Mr. Chan Wan Seong is an independent non-executive director. He is primarily responsible for matters pertaining to the Board and the overall conduct of the Group.

 

The distinct and separate roles of the Chairman and Managing Director, with a clear division of responsibilities, ensure a balance of power and authority, such that no one individual has unfettered powers of decision-making. The Managing Director oversees the day to day management and running of the Group and the implementation of the Board’s decisions and policies.

 

In 2017, the 2 executive directors received annual remuneration below RM400,000, whilst the 3 non-executive directors received annual remuneration below RM50,000. This is pretty reasonable.

 

In 2017, WEGMANS trade receivables increased from 4.8 million to 6 million, whilst trade payables increased from 10.3 million to 12.5 million. The working capital situation is in control.

 

Credit risk is minimal, as trade receivables past due in 2017 is only RM308,520 (2016 was RM385,925).

As revealed in Annual Report 2017, WEGMANS has only 1,121 shareholders, of which 70% shares are held by the 2 executive directors. Top 30 shareholders are holding 88.6% of the shares, leaving only 11.4% with minority shareholders.

 

Construction work has already commenced on the 905,397 sqft (20.8 acres) land purchased in 2016 in Mukim Parit Jawa, Muar, Johor. It is broken down into 3 phases.

 

Phase 1 is to built the following using the proceeds from IPO:

• New head office and showroom (36,198 sqft)
• Workers' hostel (140,272 sqft)
• 1 factory (144,494 sqft)

Construction of the building has been approved by MPM on 29 July 2018.

 

 

 

The construction work has already started. Estimated completion is by early 2019.

 

 

The new factory in Phase 1 will be able to double up WEGMANS annual production of chairs from current 0.48 million to 0.96 million, and tables from current 0.19 million to 0.38 million.

The HQ and showroom will also be shifted to this new building, and the existing HQ will be converted into documents storage room, production office and expanded D&D office.

 

Phase 2 construction will build another 2 factories with land area of 211,079 sqft, and Phase 3 will build another factory on the remaining land area of 151,512 sqft.
 

Based on current total share issued of 500 millions after IPO, WEGMANS past 4 years financial result is as below:

 

 

The slight reduction in net profit in 2017 was due to higher labour cost arising from higher sub-contract wages incurred to meet the production requirements and delivery deadlines for their sales orders.

WEGMANS net debt in 2017 stood at RM19.7 million, forming a Debt/Equity ratio of 56.29%. Hopefully this can be reduced with higher revenue and profit generated, especially after the doubling up of production capacity soon.

WEGMANS past 3 announced quarterly results are as below:

Note that 2018 Q1 net profit was dragged down by a one off charge of listing expenses amounting to RM1.71 million.

WEGMANS share price closed at 34.50 sen on 14 September 2018. Its estimated PE based on 4 trailing quarters, assuming its 2018 Q3 EPS stood at 0.75, will be 19.6.

Its past financial results show that it has been in a growing path.

Its 3 phases future plan with 4 upcoming new factories show that it is well prepared for future growth.

WEGMANS is showing traits of continuous growth, and it is anticipated that its growth will be boosted once its new factory commence operation to double up its production capacity.

WEGMANS has laid out their future plan and strategies as follow:

• Market penetration - increase production capacity
• Market development - diversify customer base
• Product development - increase product range and develop new product designs

On top of these, WEGMANS could be further improved if they could consider to:

• Employ more automation and embrace for Industry 4.0 to reduce dependency on foreign workers.
• Put up measure to reduce the Debt/Equity ratio to 30% or below.
• Gradually increase its dividend yield.

Disclaimer: This article is intended for sharing of point of view only. It is not an advice or recommendation to buy or sell any of the mentioned stock counters. You should do your own homework before trading in Bursa Malaysia.