The research team at PhillipCapital has downgraded Koda to “neutral” from “buy” as it expects to see a demand lull in the near term.
“We expect 1HFY2023 to be challenging. Customer inventories in the US are elevated and at record levels. With consumers shifting spending to services and discretionary spending shrunk by rising inflation, furniture demand is expected to remain weak,” the team writes.
It adds that it expects Koda to turn more cautious on new projects such as sofa manufacturing on the back of a less certain outlook.
The PhillipCapital team also notes the lower net cash of US$0.4 million ($0.56 million) on Koda’s balance sheet, down from the US$11.8 million in the year before, following the purchase of a property in Tagore Lane.
“Of the $13.8 million in gross debt, around 80% is long-term in nature,” the team notes.
In its Sept 4 report, the team has also slashed its target price estimate to 50 cents from $1.10 previously. The new target price is pegged to an FY2023 P/E of 5x ex-cash, in tandem with Koda’s historical P/E, ex-cash. The new valuation is lower than the previous P/E of 7x due to the slowing earnings momentum as Koda’s customers deal with the higher-than-expected inventory.
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While Koda’s patmi of US$5.7 million ($8.0 million) for the FY2022 ended June was down by 37.6% y-o-y, the company’s FY2022 patmi -- excluding the losses from the fire incident at Koda’s Vietnamese plant -- stood within PhillipCapital’s expectations.
SAC Capital also slashes target price estimate
SAC Capital analyst Lim Shu Rong has also slashed her target price to 64 cents from $1.14 previously.
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While Lim has kept her "buy" call, the analyst sees macro headwinds ahead for the company.
"The group faces weaknesses in its main end customer markets, North America and China. Customers from [the] North American region accounts for 80% of its original design manufacturing (ODM) sales while [around] 90-95% of its retail footprint (i.e. no of stores) are in China. Furniture demand is expected to soften in both countries," Lim writes.
In the US, Koda's new home sale units have also declined 38% year-to-date (ytd). The country's 30-year fixed mortgage rate has also soared to 5.55% from 2.87% a year ago, which further erodes US buyers' affordability.
"Koda’s immediate concern lies with inventory glut issues that US retailers are facing. US June retail inventories for furniture has grown 14% ytd. Inventories to sales ratio also rose to 1.69x compared to 1.53x in January," Lim notes. " As such, we expect to see a decline in orders placed to Koda as their customers focus on clearing their excess inventories first."
Separately, furniture sales in China are affected by the country's property market crisis and lockdowns, which have dampened consumer sentiment.
That said, Lim sees a bright light in Koda's sales at its local Commune outlets. The analyst expects sales at these outlets to do better in the 1HFY2023 from the festive sales at the year-end.
The start of Singapore's GST hike on Jan 1, 2023, could also bring forward purchases of higher-value, she says.
On the back of the macro factors, Lim has lowered her topline and bottomline estimates for the FY2023 by 16%. Her lower target price is pegged to an FY2023 EV/ebitda of 2.4x, at Koda's pre-pandemic level.
As at 3.22pm, shares in Koda are trading flat at 50 cents.
