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Koda – Clear surge in furnishing spending trend(guestpost)

Koda – Clear surge in furnishing spending trend(guestpost)

Koda – Clear beneficiary of the surge in home furnishing spending trend (1 Jun 21)

This post was originally posted here. The writer, Ernest Lim is a veteran community member and blogger on InvestingNote, with a username known as @el15 and has 500+ followers.

Since 20 Aug 2020, Avarga has more than doubled from $0.146 to close $0.305 on 1 Jun 2021. Avarga’s strength is likely attributed to its 69.7% stake in Taiga (Taiga is Canada’s largest wholesale distributor of building materials, such as lumber, panels, doors, engineered wood, roofing and others). Taiga’s business has been flourishing due to the strength in home furnishings and the housing market in Canada and US.

By extension, Koda may be another proxy to benefit from the surge in home furnishing spending trend. It is noteworthy that Koda is an Original Design Manufacturer / Original Equipment Manufacturer to its customers in North America. In fact, customers in the North America region constitute approximately 55% of its FY20 revenue. Its forte is in home furniture, and it is possibly the largest dining room furniture exporter in Southeast Asia. Home furnishing seems to be in demand as consumers stay at home and have more disposable income to spend (rather than travel) to improve their homes.

In fact, Koda’s 1HFY21 revenue and net profit jump 16% to US$39.6m and US$4.8m respectively on good demand for furniture.

Given this promising backdrop, it may be timely to take a closer look into Koda. I have the privilege of meeting Mr Joshua Koh, CEO of Commune Lifestyle Pte Ltd and Mr Kenny Zhang, CFO of Koda (“Management”) for a 1-1 discussion over Koda / Commune’s operations and prospects via Zoom. The below is my personal interpretation of my discussion with Koda’s management and my own inferences from Koda’s announcements on SGX.

 Koda’s & Commune’s background

Koda was established in 1972 by Mr Koh Teng Kwee. It started by producing wooden TV and speaker cabinets. Since its inception, Koda has progressed from being an Original Equipment Manufacturer (OEM) to an Original Design Manufacturer (ODM). Its forte is in home furniture, and it is possibly the largest dining room furniture exporter in Southeast Asia.

Besides its ODM business, Koda established Commune Lifestyle Pte Ltd in 2011. This is their in-house brand and managed by the 3rd generation of the founding Koh family. Commune has presence in Singapore, Malaysia, China, Philippines, and Hong Kong. Readers can refer to the respective websites for more information on Koda (click HERE) and Commune (click HERE).

Koda has been listed on SGX since 18 Jan 2002.

 What is so interesting about Koda?

Outlook continues to be bright

Based on 1HFY21 results (financial year ends in June), management continues to see encouraging growth in their export orders and they expect the capacity utilisation rates for our key factories to remain consistently optimal. This is attributed to generally higher demand for furniture arising from work-from-home arrangements.

Their recent proposed acquisition of Land Use Right and a factory building in Long An Province, Vietnam (see announcement dated 25 Mar 2021) to expand their production capacity corroborates the positive momentum that they are seeing in their business.

Margins are likely to be steady amid strong demand

Notwithstanding the rise in costs from timber, fabric, metal frame, foam, and shipping etc, Koda believes that they should be able to maintain their current gross profit margins (“GPM”) of around 30 – 32%. This is because firstly it can pass on such costs to the customers amid strong demand. Secondly, their Commune business has GPM of around 50%. As this segment grows and becomes more significant, it may even be able to raise its overall GPM to above 30 – 32%.

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