SHH Resources in acquisition talks

> Furniture maker wants to buy smaller, non-listed peer to expand business

KUALA LUMPUR: SHH Resources Holdings Bhd, whose share price has almost doubled over the past two months, is banking on mergers and acquisitions (M&As) to expand its business while boosting its production capacity to meet increased demand for furniture.

“In fact we’re talking to a few smaller non-listed companies, but nothing has been concluded,” executive deputy chairman Ling Hee Keat told SunBiz in an interview last Friday. He said will be the fastest way to grow and to expand the company’s product portfolio.

However, Ling has ruled out acquiring local listed furniture firms, as he doesn’t see any potential fit to its current business.

With only marginal long-term debt and a cash pile of RM24 million, he said, the company is in a good position to pursue M&As.

On a potential collaboration with Heveaboard Bhd, Ling said negotiations between the two parties are still ongoing and they hope to conclude them next year.

“We’re still exploring, given that our products and markets are completely different, the potential collaboration will provide synergy for us,” he said.

Heveaboard is a particleboard and particleboard products manufacturer and is involved in both upstream and downstream segments, while SHH only operates within the downstream sector and manufactures wood-based furniture such as bedroom suites, dining suites, entertainment sets, occasional items and home office items.

Ling acknowledged that its customers have asked for reductions in prices in the wake of the weakening of the ringgit that has brought in more profits for exporters such as SHH, whose products are entirely for export.

“We would rather add more value to the products because it is very difficult to increase prices again once you have reduced them,” he said.

According to Ling, 80-90% of SHH’s products are exported to the US and it plans to re-establish its presence in Australia and Europe. It has no intention to serve the local or regional market given that its product range is deemed more suitable for the Western market.

SHH is due to announce its firstquarter financial results ended Sept 30, 2015. Ling said sales growth for that period was very strong year-on-year despite the slowing global economy, with an expectation that earnings for FY16 will be better than FY15’s if the current trend continues.

SHH reported a net profit of RM6.58 million for the financial year ended June 30, 2015, a 20.04% drop compared with the RM8.23 million it made a year ago, due mainly to non-operational losses arising from fair value losses on derivative financial instruments.

Ling explained that the company would have achieved higher earnings if not for having to account for currency hedging, which could not be avoided, especially during a period of greater currency volatility.

He stressed that, on a net basis, the weakening of the ringgit has had a positive impact on the company but a stable ringgit is crucial for businesses to make better decisions.

As the utilisation rate of the production facilities has reached 90%, SHH has embarked on expansion plans for its manufacturing facilities in Pagoh, Johor, with a capital expenditure of RM5 million. This will increase the number of containers by between 60 and 80 a month, from the current 220 to 250 containers, depending on the size of the furniture.

On another note, Ling said a new round of minimum wage increase due in July next year is expected to affect the company’s profit margin by 2% on a worst-case scenario given that employees’ remuneration makes up 20% of its overheads. “That’s significant, given that our net margin is 6% to 8%, meaning it will be reduced to 4% to 6%.”

Nevertheless, Ling said, SHH will have to resort to increasing prices of its products to offset any impact from the minimum wage increase.

The company has a 1,200-strong workforce and this is expected to increase by 150 to 200, in line with the capacity expansion plans.

SHH is hoping to continue rewarding its shareholders by at least maintaining its dividend of 10 sen per share for FY16. “We hope we can even increase the dividend payout for the coming years,” Ling said.

SHH shares rose 14 sen to RM2.23 last Friday on some 202,600 units done.

The company’s founder and managing director, Datuk Teo Wee Cheng, is the largest shareholder, with a 24.41% direct and a 4.25% indirect stake.