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Tuesday, December 22, 2015

SYF Resources adopts ‘small plant strategy’

SYF Resources Bhd ( Valuation: 1.10, Fundamental: 1.10) is carving out an expansion strategy to cushion the adverse impact of the cyclical furniture business, enabling it to enjoy a stable earnings base in both good times and bad.

“In this business, you may have 10 quiet years and then experience a sudden spike of two years. Now that the spike (upcycle) has arrived, we have to maximise this opportunity. It’s time for us to make some good money,” its executive director Datuk Seri Chee Hong Leong tells The Edge.

He says SYF is in the midst of executing a “small plant strategy”, in which it will set up wooden board manufacturing plants near to its suppliers to support its core business in the production of finished rubberwood furniture.

“Our strategy is to start a few more of these plants as long as demand is there. We are investing in a second medium-density fibreboard (MDF) plant, which will start production in May,” Chee says, adding that this will provide an additional 6,000 to 8,000 cubic metres of MDF boards per month.

He adds that SYF (fundamental: 1.3; valuation: 1.8) will increase the number of its plants as demand for its furniture boards, dining and bedroom sets continues to rise.

Since 2010, SYF has ventured into the upstream segment, producing semi-finished products from rubberwood timber extraction, sawmilling and processing activities. It currently has two factories producing particle boards and MDF boards.

SYF’s small plant strategy has allowed it to improve efficiency by introducing a lean manufacturing concept in its factories. Waste products from its upstream operations are converted into raw materials for board manufacturing, producing an additional revenue stream while helping to reduce costs.

According to Chee, the idea is for SYF to achieve a resilient and cost-efficient business, with its four key segments — furniture, timber, boards and property development — contributing 25% each to its annual net profit.

He expects SYF to record double-digit revenue growth for the furniture segment for the financial year ended July 31, 2016 (FY2016) as it recognises revenue from its new MDF board plant and enjoys continued demand for furniture products and forex gains as a result of the stronger US dollar.

Since last year, furniture makers have attracted keen interest amid expectations of improved exports earnings, lower timber prices and the strengthening of the US dollar against the ringgit.

Among the star performers, Latitude Tree Holdings Bhd ( Valuation: 1.80, Fundamental: 2.70) (fundamental: 2.1; valuation: 1.8) recently rose 58% to RM5.01 from RM3.18 in mid-December, and Homeritz Corp Bhd ( Valuation: 2.10, Fundamental: 3.00) (fundamental: 2.0; valuation: 1.3) jumped 34% to RM1.01 from 75.5 sen in mid-December.

The board makers’ share prices have also rallied. Heveaboard Bhd ( Valuation: 1.10, Fundamental: 2.70) (fundamental: 1.3 valuation: 1.8) has leapt from RM1.48 to RM2.70 while Evergreen Fibreboard Bhd ( Valuation: 0.30, Fundamental: 1.00) (fundamental: 0.8, valuation: 1.2) soared from 51.5 sen to 91.5 sen during the same period.

However, SYF’s share price has not fared as well. The stock has been drifting around December 2014 levels.

As exports make up about 40% of SYF’s revenue, the company hedges part of its foreign exchange exposure to mitigate risks. Thus, according to Chee, it won’t benefit as much as its peers from the weaker ringgit, which recently dropped to a six-year low against the US dollar.

Despite that, and as it continues to allocate resources to its property development segment, which it diversified into at end-2011, this conservative strategy is likely to serve it well over the long term.

Chee explains that SYF’s business strategy has helped it weather tough times in the cyclical furniture industry, like it experienced in 2012, when a shortage of raw materials pushed costs up and a strong ringgit squeezed margins, forcing many players out of the game.

“We have gone through many cycles… as long as we’re able to capitalise during the spike and break enough margin, the rest [of the time] will be business as usual,” he says.

Chee acknowledges that SYF is still actively looking out for merger and acquisition (M&A) opportunities in both upstream and downstream operations. However, a potential company would need to be a good complement to SYF’s existing operations and come at the “right” price.

“There must be a synergistic effect. We are willing to pay more if [that means] we can double our profit,” he says, adding that should SYF acquire an entity that is deemed expensive in terms of price-earnings ratio, there will be strong justification in terms of its synergy with its existing business.

“At one point, we were looking at an M&A in the downstream [business], but the price was not right. We like M&As that have predictable earnings, where the synergic effects will increase [both parties’] profitability,” says Chee.

As for the property development business, Chee admits that it is getting “challenging”, partly due to the implementation of the Goods and Services Tax in April. However, he expects better contribution from its furniture segment to help offset any fall in earnings from its property division.

SYF plans to launch its Kiara Plaza mixed-use development in Semenyih, which has a gross development value (GDV) of RM330 million, and Wira Heights landed property project (GDV: RM100 million) in Sungai Long in May.

“These two projects will contribute to our revenue in FY2016-FY2017. Recognised over three years, we’re talking about RM150 million per year,” says Chee, adding that SYF’s projects will continue to be mainly in the Semenyih and Sungai Long areas.
Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on February 16 - 22, 2015.

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