Brooke Asia (formerly Latitude Tree International Group)

Latitude is a furniture manufacturer. The company manufactures the furniture in Vietnam and exports them, mainly to US and Canada. It's operations are not complex and easy to understand.

I did some analysis work on the company and I would like to share it with the forum members. This is not recommendation, just a learning experience and opinion sharing.

The company trades for 58M$. As raw materials become more expensive the margins during July 10 - Dec 10 deteriorated quite a bit and so did the share price. The management also made a comment that despite higher sales, the operating profit figure might not improve this year. The company is expanding in Vietnam. The company is an industrial manufacturer, as such, we have to account for the CAPEX over time in our valuation.

Unlike many Chinese companies that keep the cash, this company shares the profits with the shareholders and the current dividend yield is slightly above 12% a year. To me, it seems like this dividend can be maintained even in an expensive raw materials environment as we experience now. The company has some debt but not one to put it's financial position at risk. In addition, the management has not diluted shareholders as long as the record goes.

I believe that in the same way that FY2010 margins were not sustainable (were too high), the current EBITDA margins are too low in historical perspective and are more likely than not suppose to improve over 1-2 years time. In addition, as the US economy recovers the company might be able to charge its customers higher prices.

Before I get into the numbers, note that I attached an excel sheet with some useful data that may help to value the company. The company's fiscal year is from mid-mid year. In the first half of FY2011 (July 2010-December 2010) the revenue came at 87.8M$. Being conservative, I assumed the year's revenue to be 170M$ (the second half of the FY usually shows better sales). I assumed EBITDA margins of 11% which are in the lower range of the last 6 years. I also allowed some more-than-usual capex due to the expansion and I'm getting to projected 8.5M$ net income for the year (full details can be found on the attached excel), under a conservative scenario. If we will assume EBITDA margins of 13% and sales of 190M we can come at a profit of 14M$ at a more optimistic scenario.

The two values imply a PE range between 7.8 and 4.7 depends how optimistic you are. Even the conservative case implies, in my opinion, an attractive valuation for a growing business that pays more than 10% dividend per year.

I would love to get comment and insights from the forum participants.

Yang Li

How did you come up with total 3c dividend for FY 11? Is that just your estimate?

Actually the dividend yield for FY 10 based on current price is a much more impressive 16%. They paid 1.8c in Mar 2010 and 2.2c in Nov 2010 giving a total of 4c.

I took a quick look at its FY10 AR and noted that it has positive free cash flow for both FY 09 and FY 10. It currently has 27 million in cash or about $0.11 per share.

(not vested)

(06-04-2011, 03:49 PM)lonewolf Wrote: How did you come up with total 3c dividend for FY 11? Is that just your estimate?

Actually the dividend yield for FY 10 based on current price is a much more impressive 16%. They paid 1.8c in Mar 2010 and 2.2c in Nov 2010 giving a total of 4c.

I took a quick look at its FY10 AR and noted that it has positive free cash flow for both FY 09 and FY 10. It currently has 27 million in cash or about $0.11 per share.

(not vested)

Hi, the 0.03 is indeed my estimate, based on 0.014 distribution in last half-year. In their latest half-year report you can see that they paid 0.014 per share. So if we multiply that by 2 we get 0.028 per share. That number over 0.245 (the price of the stock when I wrote the post) gives 11.4% assuming same dividend can be paid for the following period. In the excel sheet I took 0.03 but anyone can play with the numbers.
It will be nice if members can write here their estimations and why they estimate this way.

This stock has ratios that are hard to believe, very low PE's and high div yields but if the proof of the pudding is in the div yield then they have been delivering after all. Last year they gave out 4 cents. This year will be lower- just a rough guesstimate 2.5 to 3 cents, I think. They have given out 1.4 cents already for 2011, if I am not mistaken. Margins are being squeezed by the weakening US dollar and higher cost of raw materials, which will hurt the div yield as well. The business is also affected by the US economy and housing market (more new homes means more furniture to sell). Their only market is going to be the US.
Their Malaysian parent is not doing very well.
I believe that the company is quite dull but should be a good value proposition. I would be waiting for the company to seek new markets and perhaps start a retail brand of its own and source for cheaper wood in the South east Asian region...and maybe seek a secondary listing in HK or Taiwan.

Hi Yang Li

On the surface, furniture making does not appear to have entry barriers to competitors. May I find out what are the real value propositions for this company?

What are the factors that set it apart from the rest? Why are the export markets only in US and Canada?

Thank you.

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(06-04-2011, 03:16 PM)Yang_Li Wrote: Latitude is a furniture manufacturer. The company manufactures the furniture in Vietnam and exports them, mainly to US and Canada. It's operations are not complex and easy to understand.

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LTIG just acquired 85% interest in GROB HOLZ Company. What is the significance of this acquisition?

Tks.

Found this report back in Dec 2009 [LTIG's Parent Company in Malaysia]

A dull business but the group has shown that it can maintain profit year after year...amazing....



http://www.theedgemalaysia.com/features/...ItQ8.email

Latitude Tree thrives in unexciting sector

This article appeared in Corporate page of The Edge Malaysia, Issue 784,Dec 7 – 13, 2009.
Latitude Tree Holdings Bhd triggered an unusual local event recently — the stock was bought until its price rose limit-up. 
It was all the more unusual considering the company manufactures furniture, which is viewed as an unexciting and unprofitable sector. 

The stock’s sudden surge was probably due to the surprise in Latitude Tree’s net profit of RM11.1 million in its 1QFY2010 ended Sept 30, compared with RM6.5 million in the preceding quarter and RM2.1 million in the corresponding quarter last year. 
The latest 1Q earnings are a record for the company and translate into earnings per share of 17.2 sen. The morning after the announcement, the share price zoomed up to about RM1.50. It had hovered at the RM1.10 level for several months before that. 

So, what took the quarterly profit to a record level when the housing recovery in the US, Latitude Tree’s biggest market, is slow rather than steady? 

One of the factors is the reduction in the industry’s manufacturing capacity after factories in China and Vietnam closed down during the global crisis, a company official tells The Edge. “Supply was reduced, and because of that, the demand is greater than our capacity,” he adds. 

“In Malaysia, we have the capacity to produce furniture worth US$2.8 million a month but we’ve orders for US$3.5 million a month.

“For our Vietnam plants, our monthly capacity is for US$9 million but we have orders for RM12 million,” he says, adding that orders are fulfilled by workers putting in overtime work. In addition, Latitude Tree outsources some of the orders to other manufacturers, both here and in Vietnam. 

Internally, the Latitude Tree group has reduced its own production capacity like the rest of the industry, selling its  factory in Ijok, Kuala Selangor. “In Malaysia, we now manufacture furniture in one location in Kapar, Selangor. That reduced our capacity to US$2.8 million a month in this country from US$5 million a month previously,” says the company official.

The group has a plant in Terengganu which handles upstream activities like saw-milling and kiln drying.  In Vietnam, Latitude Tree has three factories on 100 acres of land. 

Land cost in Vietnam has become a barrier of entry to potential participants to the industry.  “When we bought our land, it was US$25 per sq m. Now it’s US$100 per sq m,” the official says. 

The group’s 1Q results showed conspicuous improvement partly because management stopped the losses in the Malaysian factories. That enabled the profits of the Vietnamese operations to surface noticeably, he says. 

This is unlike its FY2009 ended June 30, when the Malaysian results cast a shadow over the group’s performance in Vietnam. That was when the Malaysian division incurred a loss of RM8.2 million against the Vietnam division’s pre-tax profit of RM22.9 million. That effect, and other charges, led to the group making a pre-tax profit of only RM9.9 million.

Similarly in FY2008, its Malaysian operations suffered a loss of RM8.6 million.

There was a marked turnaround in 1Q of the current financial year. The Malaysian operations were at breakeven level, posting a pre-tax profit of RM26,000 while the Vietnam division expanded its pre-tax profit to RM16.9 million. 

The turnaround in the Malaysian operations was achieved through the removal of excess capacity, namely the Ijok plant, and productivity improvements in the other plants, the official says.

There is a difference between the Vietnamese and Malaysian operations. The Kapar plants produce dining sets from rubber wood while the Vietnamese plants manufacture bedroom sets from various imported wood such as oak and cherry, as well as local hardwood. 

The continuing weakness of the Vietnamese currency, the dong, has not impacted Latitude Tree’s finances. “We don’t convert all our US dollar revenue into dong or ringgit. We convert only what we need to pay for local expenses, and we keep the rest in dollars in a foreign currency account to pay for imports,” the official says. 

In terms of seasonality, Latitude Tree sees a slightly slower period in its third quarter between January and March. The company will be making use of that period to upgrade its machinery in Vietnam, which would expand production capacity by about 10%. 

Apart from that, the company will not be expanding its plants. It may, however, consider geographical expansion with an eye on distribution in markets where its customers are not engaged. 

The group completed a corporate exercise in August when it listed Latitude Tree International Group Ltd (LTIG) on the SGX Catalist (a sponsor-supervised listing platform) in Singapore. LTIG was listed after a placement of 36 million shares at S$0.22 a share. 
There’s been scant interest in LTIG since then. The stock was last traded at S$0.22, its placement price. It’s thinly traded partly because fund managers often prefer to invest in the big caps instead. 

At the same time, LTIG’s free float is small — some 24.05% of its equity — as it remains a 75.95%-owned subsidiary of Latitude Tree, the official says.

The large stake that Latitude Tree has retained in LTIG also means that “leakage” of profits from the latter through minority interests is not too large. Hence, minority interests amounted to RM2.2 million in 1Q out of the company’s net profit of RM13.4 million. 

Latitude Tree has tended to pay out about 25% of its net profit as dividends, which could be raised this year in view of the record profit that is expected. Although the furniture industry is viewed as volatile or loss-making, the group has been consistently profitable, with earnings in the range of RM10.3 million to RM19.8 million in the last five years. 

The company is controlled by Lin Tzu-Keng, a Taiwanese who is deputy chairman of Latitude Tree in which he has deemed interests 

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Biz Interview : Lin Tzu Keng, CEO, Latitude Tree International Group Limited
(sept 2010)

1) Why did Latitude Tree decide to list on SGX Catalist in October 2007?

The listing provided Latitude Tree International Group (“LTIG”) cheaper access to capital and enabled us to tap into a wide pool of stock market investors for future growth.

2) As you probably know, a Catalist company was delisted recently because it was unable to engage a sponsor for more than three continuous months as required by SGX. What are you doing to minimise the chances of that happening to your Group?

We have detailed corporate plans focused on growth and are also mindful of SGX regulations.

3) What is Latitude Tree International Limited’s com- petitive advantage?

We are able to produce high quality products in large volumes, deliver large-volume orders promptly, and produce a wide range of products as a “one-stop centre” so that buyers do not need to go to several places to place orders.

We also have cost-competitive advantages, as we were the first to set up factories in Vietnam. During that time, the entry and construction costs were low, and the lands we bought were affordable.

In addition, we have a highly experienced management team to set up efficient production lines, develop new prod- ucts and manage production controls and operations.

Our strong R&D team is able to develop three to five new designs every month.

We have also established good long-term relationships with our buyers, suppliers and sub-contractors. We work as a team with them and support one another to compete glob- ally.

4) Your sales continued to increase in FY2010, despite housing woes in the US where you get the bulk of your revenue from. What accounts for this increase in demand?

The US accounts for over 90 per cent of LTIG’s sales. Our sales to the US continued to increase despite the housing woes there mainly due to several reasons. Firstly, LTIG’s products are more inclined toward consumer products, or more specifically, basic furniture, which people still require during bad times.

In the case where people have to move to new homes, the shifting costs of old furniture is more expensive than buying

a new furniture set in the US.

Furthermore, competition from China manufacturers is reduced as they are shifting their resources to cater for their growing domestic market. The Chinese government is also encouraging China manufacturers to sell to the domestic market.

In addition, LTIG’s sales to the US account for a very small percentage of all furniture imported by the US.

5) What advantages do you gain as an ODM?

The only advantage of an ODM (original design manufac- turer) over an OEM (original equipment manufacturer) is with ODM products, we can sell to more buyers and we can determine the size and type of materials to be used.

6) What is the nature of your expansion plan?

It has always been part of LTIG’s plans to diversify into other export markets. As LTIG’s products are more related to consumer products, we will focus on countries with many consumers, such as China, Vietnam and India. We plan to work together with our existing agents or distributors to penetrate into the new markets.

7) What challenges do you expect as you expand upstream and downstream in the longer term? How do you plan to overcome these challenges?

We should not face any major challenges for the upstream expansion as we are very experienced in upstream opera- tions and have the expertise to overcome anticipated challenges.

As for the downstream expansion, the challenges will be finding the right property, location, local logistic partners and retail management team. To overcome such challenges, we plan to work together with our existing agents or distributors who are experienced in setting up retail outlets and manag- ing such operations.

8) What prospects do you see in new markets you expand into?

We expect to see revenue growth in new markets within the next three to five years.

I think the key to their profit lies in one sentence:

"One of the factors is the reduction in the industry’s manufacturing capacity after factories in China and Vietnam closed down during the global crisis, a company official tells The Edge. “Supply was reduced, and because of that, the demand is greater than our capacity,” he adds. "

economics tell us that when an industry has little barrier of entry, there will be more players who is willing to take in a lower return. In such an industry, cost is the only possible advantage that is able to substantiate their returns in the long run. Their cost advantage lies in owning the piece of land in Vietnam and buying it at 25% of the current price. You can see that they have huge amount of properties in Vietnam. This advantage might or might not be sustainable as we have seen how wages in China have been rising over the years though their cheap land is a strong buffer. In 2009, Vietnam has 2000 furniture manufacturers of which 15% are export-oriented.

"Ashley Furniture Industries and Broyhill Furniture Industries and RiversEdge Furniture Company accounts for 65% of their sales in 2009.Repeat customers (a repeat customer is a party who has made at least two purchases from our Group for the periods under review) contributed 92.3%, 91.5%, 97.4% and 99.6% to our total revenue in FY2006, FY2007, FY2008 and HY2009 respectively. " Therefore, another key risk is if these customers are companies with strong balance sheet and demand for their products.

1 last risk will be forex risk where they suffered a 30% forex/Net Profit loss last year. They also have $29m of debt as compared to $50m of equity and their FCF is not very nice either

Ashley Furniture Industries (more than 50 yrs)

With over 50 years of innovation and experience in the furniture industry, The Ashley Companies(Ashley Furniture Industries, Inc.) has become an industry leader as a manufacturer of quality furniture products.

http://www.ashleyfurniture.com/Sitemap/A...Id=AboutUs#

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Broyhill Furniture Industries (more than 100 yrs)

For more than a century, the name Broyhill has been associated with fine-quality furniture. Throughout all that time, the guiding force that has defined the company and its products has been a commitment to quality and value. Today, the Broyhill brand is one of the most recognized brands in the industry.

Broyhill has achieved this success through a commitment to superior craftsmanship, product innovation and investment in the best people in the industry. From manufacturing to marketing, Broyhill has been an industry leader, setting the standard for today and the future.

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RiversEdge Furniture Company (more than 60 yrs)

We represent key international furniture manufacturers using a well defined outsourcing strategy that can provide you access to all of your sourcing needs.
With over 60 years of experience (our principals) in the furniture business, we have seen how our services can be a key operational driver for cost savings, productivity increases, and competitive differentiation.

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THis is the interesting part


4) Your sales continued to increase in FY2010, despite housing woes in the US where you get the bulk of your revenue from. What accounts for this increase in demand?


The US accounts for over 90 per cent of LTIG’s sales. Our sales to the US continued to increase despite the housing woes there mainly due to several reasons. Firstly, LTIG’s products are more inclined toward consumer products, or more specifically, basic furniture, which people still require during bad times.

In the case where people have to move to new homes, the shifting costs of old furniture is more expensive than buying

a new furniture set in the US.

Furthermore, competition from China manufacturers is reduced as they are shifting their resources to cater for their growing domestic market. The Chinese government is also encouraging China manufacturers to sell to the domestic market.

In addition, LTIG’s sales to the US account for a very small percentage of all furniture imported by the US.

http://www.freeenterpriseland.com/BOOK/BLUMKIN.html

http://en.wikipedia.org/wiki/Nebraska_Furniture_Mart

Simple furniture business but they made it very big....


In 1983, Warren Buffet- Omaha resident and the second richest man in the United States bought an 80% interest in Nebraska Furniture Mart on a handshake from the Blumkin family for $55 million. He said that he would want to be involved in any business Rose Blumkin was a part of even if it was a popcorn stand. Buffet had often thought of buying the store, and on his birthday just walked in and asked how much they would sell it for and wrote them a check.

About the transaction he said, I would rather have her word than that of all the Big 8 auditors. It's like dealing with the bank of England." The deal has been called the "historic Omaha handshake".