POHUAT

 Long Term Chart

5 Phases:
Phase 1: 2006-2013 sideways range (17 sen to 50 sen).
Phase 2: 2014-2015 strong Bull Run (50 sen to RM2.10)
Phase 3: 2016-Mar 2020 Covid bottom:  LT XYZ correction from RM2.10 peak down to 70 sen (nearly 2/3rds)
Phase 4: Mar 2020-Nov 2020 strong Covid Recovery from 70 sen to RM2.06 (not new high).
Today:  Sideways consolidation, trading at 1.33 (at the time of writing), nearly 50% of the 70sen to RM2.06 range (Fair technical value).

Price action reflects the cylical business partially.

Profile

POHUAT is a small to small mid cap company, primarily in the furniture business (both home and office).

North America exports, exposures to South Africa, Vietnam besides Malaysia. In general, whilst strengthening USD improves earnings and vice versa, the extent is relatively minor impact compared to total historical EPS volatility.

Large Cash Holdings

POHUAT has a hugeNet Cash position relative to stock price:

From 31/10/23 latest Quarterly Report: Cash + ST investments ~ RM309 million with no borrowings.  This is roughly equal to RM1.16 per share.

This means the business is severely under-valued since excluding Net Cash, the business is only valued at 17 sen (=1.33-1.16).  So, if you could buy POHUAT in its entirity at 1.33, odds are good that you could make back you money in just 1 year and own the entire company for free.  This is because its long term EPS is higher than 17 sen.  Obviously everyone in the market knows this, so, what's the catch?

Rapid Net Cash Growth since 2015

Except for 2021, the Net Cash grows every year.  The CAGR is 30.2% per annum, super amazing.

Past 10 Years Per Share Statistics - Cyclical

RPS, EPS, DPS has negative CAGR when measured over past 10 years, however, this is uneven due to high start year - FYE2014 - which was cycle high.

So, CAGR over 10 years is not suitable metric to cyclical business.

Cyclical business are better bought during cycle lows and sold during cycle highs.

Is it a long term superior business?

The long term business is cyclical.  It's Net Cash growth indicates that it is probably above average.  However, it may not be optimal to buy at any time and hold forever.  The investor can get better returns by timing his entry and exiting when price spikes more than x years of dividends.

Retained Profits

The 2% CAGR for NAPS is not inspiring, however, this is due to the cycle high starting period.  Over 9 years, it is inspiring.   

Dividend Payouts
DPS ranged from 7 sen to 9 sen 80% of the time (except for a couple of outliers in 2018 and 2021), long term DPS assumption of 7 sen is prudent.

Low Payout Ratio from 27% to 69%  suggesting conservative management.

Some insights into Management ultra conservative thinking that prioritizes growing Net Cash over shareholder payouts:

- In 2018, EPS dropped from 26 to 21 sen, still higher than 8 sen dividend paid prior year, but management chose to reduce to 6 sen and grow Net Cash.  This is clearly conservative, they prioritize cash balances over profit sharing with shareholders.
- In 2021, EPS crashed from 22 sen to 12 sen (still profitable), but management chose to cut DPS from 9 sen down to 5 sen, suggesting the same kind of very conservative thinking, when EPS is still larger than DPS and growing Cash Balances.

So, it is clear that management prioritizes cash balance over profit sharing with shareholders.   Until something changes to the dividend policy or management, whilst it is an undervalued company, you may not want to own it in a huge way.  Keep it a small % of your portfolio.

Does POHUAT beat MAYBANK to deliver > 9% per annum?

Dividend yield ~ 5% to 5.5%

Historically, POHUAT pays 5 to 9 sen (averaging 7 sen) per year.  At RM1.33, the long term DY is probably around 7 / 133 ~ 5 to 5.5%, but probably on the lower side longer term, as management prioritizes growing its cash balances over profit sharing with shareholders. 

Price gains depends on entry price 

A few scenarios -see above table.

Some conservative price targets from RM1.33 entry showed that it is easy to achieve 4%-5% p.a. price returns.  In fact, when I first wrote this article it was trading at RM1.33 and today, it is already RM1.43 delivering 7.5% returns in less than a month. 

Caution:  Company / Management is not trustworthy to share profits fairly with shareholders

Why?  Their actions over the past 8 years speak louder than words.

Compare 2015 to 2023 looking at DPS vs Net Cash

- At FYE 2015, DPS = 8 sen and Net Cash = RM37 million.

- At FYE 2023, DPS = 7 sen and Net Cash = RM309 million.

Over the 8 year period, DPS is flat/decline, but Net Cash grow by 8 times, or nearly 1 order of magnitude.

Can you trust management to share profits fairly with you?  It pays higher DY than FD, so, it rates at least 5/10, however the flat DPS scores poorly and maybe 5.5/10 due to high Net Cash growth.

Valuations - Undervalued

It is clearly undervalued by Book Value - NAPS > RM2 vs current price of RM1.33.  
It is clearly undervalued vs Net Cash - Net Cash RM1.16 vs current price of RM1.33.
It is undervalued by EPS which ranged from 10 sen to 32 sen.  Net of Net Cash, the business P/E ranges from 1-2 times only.
It is fair valued by DPS which ranged from 5 to 9 sen averaging say 7 sen giving 5%-5.5% DY which beats FD but doesn't quite beat EPF.

A skeptic may say that Market may be telegraphing that this company may be sunsetting, as the founder gets older.  It is a pessimistic view, but not impossible.

Forex Exposure

For noting/ future reference only.

Capital Commitment

As of 31/10/2023, no capital commitments.

This company has a clearly superior cash generating machine - the problem though is that it is "stingy" and "doesn't share profits with minority shareholders".  No future plans to grow?

Director's Shareholding

Uncle Tay Kim Huat (Group CEO) clearly wears the pants in the Board since founding the company, or at least as far back as 2000, 23 years ago.  Back then, he already owned 21% and his share has remained relatively constant % till today.

Last Insider trading

Uncle Tay Kim Huat added 20,000 shares at Open Market at RM1.28!

Despite owning 56.6 million shares (at constant 21% shares), he still can't help himself to go into Open Market to add 0.02 million shares when price is RM1.28 i.e. when it is cheap.  

This kind of action speaks volumes about the kind of person that Uncle Tay is.  

In short, he probably counted pennies in the old days, and probably still count pennies today.  He is a big hoarder, and likely to continue to hoard in the future.  Why?  It's in his DNA and don't count on DNA changing.

Will Buffett buy POHUAT at RM1.33 when he was starting out?

Recall, Buffett is a Buy and Hold investor so his criteria for Berkshire buying are:

(1) Superior business company (one that generates free cash flows), 

(2) Trustworthy (treat shareholder fairly) management, and 

(3) Attractive Price.   

POHUAT clearly meets (1) but probably barely passing in (2).  And today's Price at RM1.33 is midrange.

Target Position Sizing

Some of you may be aware that as of today, I own around 49 stocks, but you may not know that only 33  stocks has DY > 4% per annum.  So my neutral position size is around 3% capital.   

So, if I like the stock very much, I will own it bigger than 3% to perhaps 4.5% to 5% capital.  What about this stock?

Currently, it's around 2.4% of my capital, so, slightly below 3% neutral.   My target was perhaps 2.8%, and I was trying to accumulate just a little bit more but price ran up before I had the chance to get more.  But not a big difference.  I'm not a chaser for the remaining 0.4%.

Why less than neutral?  Despite being a very attractive business, market has not valued this stock properly for a decade and unlikely to revalue it because it knows the owner is stingy.  So, you can reliably expect 5%-5.5% DY, but as for price gains, that's very dependent on market whilst the business keeps growing its Net Cash.   The owner has been like this for 23 years, there's no rule to say that he can't continue doing this till his death bed.  A pessimistic view for sure, but it's better to be prudent when planning, so that when things turns out better than you plan, it's a bonus.   My style of thinking has given me huge bonuses across many stocks.

When to Exit?  Is this a stock we can hold forever?  What are the risks?

In general, my exits will be guided by charts on profit taking.

There's no stop loss for this business as it is hugely under-valued.

As a rough rule of thumb, if price runs up too fast to give me say 3-5 year dividends in 3-5 months, sure, I'll be tempted to take some partial profits.

I won't hold this stock forever, based on long term charts - it's a cyclical industry.

 

Risks are plenty as always, even if majority of times it doesn't eventuate:

1. Market risks - all I know is over next 5-10 years, markets are sure to crash.  However, Malaysia stocks need to rise first, as past 5-9 years, it has been flat/downtrending.  Foreigners haven't yet come in in full like before.

2. Industry/sector risks - the furniture business is cyclical but I don't have special skills to predict this.  My strategy is simple - as I am still under-weighted slightly, lower price is a buy.  Higher prices, is a partial profit take.

3. Company specific risks - Uncle Tay is probably the largest risk here.  He is elderly now.  How good is his successor and does his successor have the same business acumen and drive as he?  

Because of all these risks that can theoretically give rise to losses (and potentially permanent losses too for some), our only protection is Position Sizing - hence, around 2.8% or so.

Summary and Conclusion

1. I want to own this business when it's "cheap" (after net cash basis and > 5% dividend yield).  It's a cash generating machine, proven with 30.2% CAGR growth in Net cash since 2015.  

2. The yearly dividend yields is solid, stable, most of the time, ranging from 5 to 9 sen, extremely well supported by the business, giving 5%-5.5% dividend yield per annum long term.  Beats FD.  If we do nothing, very likely we'll beat FD in the long term here, but no single stock is full-proof, hence, 2.8%-3% capital target position size.

3. Don't get too greedy - remember, Board/CEO have proven many times that they prioritize growing Net Cash more than sharing profits with shareholders.   

4. Lack of capital commitment tingles our spider sense.  Where will future growth come from without capital investment?  Is this company sun-setting, as the founder is getting older and should already by retiring?