Focus Lumber Bhd (25 Feb 2025)
(1) Historical performance
2011: Sales increased by 1.5% (from RM120.38 million to RM122.15 million), and net profit rose by 34% to RM13.72 million.
2013: Total revenue grew by 10.9% (from RM132.80 million to RM147.21 million), and profit before tax surged by 83.2% (from RM8.38 million to RM15.35 million).
2014: Revenue increased by 2.20% (to RM150.42 million), and profit before tax improved by 12.70% (from RM15.35 million to RM17.30 million).
2015: Revenue rose significantly (from RM150.42 million to RM180.73 million), and pre-tax profit more than doubled (from RM17.30 million to RM36.32 million).
2018: Revenue increased by 16% (to RM203.43 million), and operating profit surged by more than 150% compared to the previous year.
2021: Revenue improved by approximately 53% over 2020, and the company turned an operating loss of RM11.13 million in 2020 into an operating profit of RM17.41 million.
2022: Revenue increased modestly by about 1% (to RM134.82 million), while operating profit nearly doubled to RM34.62 million, and profit after tax rose by 80% to RM27.67 million.
In other years:
2012, 2016, and 2024 saw sales increases but declines or persistent losses in earnings.
2017, 2019, 2020, and 2023 experienced declines in both sales and earnings.
Factors Behind Improved Performance by Year
2011
External Demand Boost: A surge in plywood demand and prices, driven by the Japan earthquake and tsunami, created a significant external boost, leading to increased sales and strong earnings growth.
2013
US Market Dominance: The US market accounted for 66.4% of sales, with a 9.6% year-on-year increase, highlighting its strategic importance.
Favourable Exchange Rates: The weakening of the Ringgit against the USD resulted in a 6.3% year-on-year increase in the average selling price of plywood, improving export margins.
Improved Production Yield: Enhanced production yield contributed to higher sales and revenue.
2014
US Market Dominance: The US remained the major market, contributing about 66.4% of sales, with strong demand driving sales.
Currency Advantage: The continued weakening of the Ringgit against the USD improved margins on export sales.
Better Production Yield: Operational improvements led to better production yield, supporting a 2.20% increase in revenue and a 12.70% rise in profit before tax.
2015
Higher Sales Volume: Increased sales volume, particularly in the US market, drove a 20.15% revenue growth.
Stronger USD: The stronger US dollar against the Ringgit boosted revenue and margins on exports.
Effective US Market Focus: The strategic focus on the US market, which had higher demand, helped offset operational challenges.
Operational Efficiency Initiatives: Investments in human capital and productivity enhancements supported long-term improvements, contributing to a more than doubling of pre-tax profit.
2018
Recovery from Log Supply Challenges: After previous struggles with log supply, the company saw a 16% increase in revenue.
Surge in Global Plywood Prices: A strong increase in global plywood prices drove a more than 150% surge in operating profit.
Market Expansion and Diversification: The company expanded its customer base by entering new markets, such as the United Kingdom and Thailand, where it offered different plywood thicknesses at attractive prices.
2021
Higher Production Levels: Easing of pandemic-related movement control restrictions allowed the company to extend operating hours and increase production by around 20%.
Increased Selling Prices: Strong demand, particularly from the US, led to a 27% growth in the average selling price.
Easing of Pandemic Restrictions: The relaxed operating environment enabled better production and sales performance.
Strong US Demand: The US market remained a key driver, with exports accounting for 85% of total revenue, up from 80% in the prior year.
2022
Higher Selling Prices: Despite a 27% decline in sales volume due to shipping and logistic challenges, the average selling prices of plywood, veneer, and LVL increased by 37%, 15%, and 9%, respectively.
Favourable Exchange Rates: A favourable USD/MYR exchange rate helped boost margins, contributing to a near doubling of operating profit.
For the other subpar performance years, below is a summary of the classification of unfavourable factors affecting the company's performance.
Temporary/Cyclical Factors
These factors are tied to economic cycles, market fluctuations, or short-term events and are expected to change or reverse over time. They include:
Raw material price fluctuations (e.g., rising costs in 2012, higher production costs in 2024).
Currency volatility (e.g., currency fluctuations in 2012, currency headwinds in 2024).
Log supply shortages (e.g., in 2016, 2017, 2019).
Weak global demand (e.g., weak demand in 2019, 2020, weak lumber market in 2023).
Logistical disruptions (e.g., freight and logistical challenges in 2020, 2024).
Inventory write-downs and provisions (e.g., in 2023, 2024).
Asset impairments and one-time adjustments (e.g., in 2023).
Economic uncertainty and short-term events (e.g., economic uncertainty in 2012, COVID-19 pandemic in 2020).
These cyclical factors are more frequent and often tied to broader economic trends but are generally temporary in nature.
Permanent/Structural Factors
These factors represent long-lasting changes that fundamentally alter the business environment or the company's operations. They include:
Regulatory changes (e.g., minimum wage increases in 2012, 2019, increased tax expenses in 2016).
Competitive pressures (e.g., competition from lower-cost producers in 2017).
Permanent loss of revenue streams (e.g., cessation of veneer sales due to customer closures in 2019).
Market concentration risks (e.g., heavy reliance on the US market and a single customer in 2023).
New administrative costs from business diversification (e.g., investments in timber plantation in 2024).
The year 2019 loss of veneer sales did not send the company sales/earnings to downfall, as the company also achieve high sales and profitable business in year 2021 and 2022. The main selling product of the company is plywood. The additional investment in timber plantation is to secure consistent flow of timber.
(2) Current trend and how to benefit from it
Increased Demand for Plywood
Housing Sector: The US housing market is projected to experience moderate growth 2.89% CAGR from 2025 to 2033, reaching $30.8 billion by 2033. This growth is fuelled by urbanization, population expansion, housing shortages, and government initiatives like the Biden administration’s infrastructure bill. Plywood is extensively used in residential construction for flooring, wall sheathing, roofing, and cabinetry, suggesting a rising demand that FLBHD can meet.
RV Sector: The RV market is stabilizing and expected to grow, with shipments projected to increase to 346,100 units in 2025 from 324,100 in 2024, and the North American RV market growing from $19.70 billion in 2024 to $24.78 billion by 2030 at a 3.52% CAGR. Plywood is a key material in RV construction for structural components and interiors. FLBHD can benefit by expanding production or exports to supply this growing market, particularly if it targets the US, a major plywood consumer.
Sustainability Trends
There is a growing preference for eco-friendly materials, with no significant shift away from plywood. Innovations focus on sustainable production methods, such as low-VOC adhesives and FSC-certified plywood. If FLBHD adopts these practices and obtains relevant certifications, it can appeal to environmentally conscious buyers and comply with stricter emissions standards like California’s CARB, strengthening its market position.
Rebuilding Efforts After Natural Disasters
Rebuilding efforts following events like the Southern California wildfires, which destroyed over 12,000 structures, could create localized spikes in plywood demand. FLBHD could position itself as a reliable supplier during such high-demand periods, boosting short-term sales.
Global Market Growth
The global plywood market is projected to grow from $48.95 billion in 2024 to $73.01 billion by 2033 at a 4.54% CAGR. This broader growth provides FLBHD with opportunities to expand its market presence, particularly if it leverages export opportunities to the US and beyond.
Potential Risks to Sales and Earnings
While the trends are largely positive, several risks could impact FLBHD’s ability to fully capitalize on these opportunities:
Economic Downturns and High Interest Rates
High mortgage rates (6.5–7% in 2025) could reduce housing affordability, slowing new construction and remodelling activities. Similarly, economic uncertainties might decrease consumer spending on RVs, affecting plywood demand in that sector. These factors could limit FLBHD’s sales growth if demand weakens.
Increased Competition
FLBHD faces competition from other plywood-producing countries like Vietnam and Brazil, which are major suppliers to the US, as well as domestic US producers who may increase production or innovate. To remain competitive, FLBHD must ensure its products are cost-effective and of high quality.
Material Substitution
Alternative materials such as cross-laminated timber (CLT) and fiber-reinforced polymers could challenge plywood’s market share, especially in premium housing projects. If these substitutes become more popular or cost-competitive, FLBHD might see a decline in demand for its plywood products.
Supply Chain Disruptions
Raw material shortages (e.g., logs) or export restrictions in FLBHD’s home country (likely Malaysia, a major plywood producer) could hinder production. Additionally, logistical challenges like rising freight costs or transportation bottlenecks, noted in early 2024, could delay deliveries and increase costs, impacting profitability.
Regulatory and Trade Policy Changes
Stricter environmental regulations, such as low-VOC standards or formaldehyde-free requirements, may require FLBHD to invest in compliance, raising production costs. Trade policies, including tariffs or anti-dumping measures on plywood imports (e.g., Chinese plywood rerouted through Vietnam), could disrupt supply chains or make FLBHD’s exports less competitive in the US market.
Currency Fluctuations
As an exporter, FLBHD is exposed to exchange rate volatility, particularly between the Malaysian Ringgit (assuming it is Malaysia-based) and the US Dollar. A strengthening Ringgit could increase the price of its plywood in the US, potentially reducing demand and affecting earnings.
Overall future expectations
FLBHD’s future growth is expected to be modest. The company is unlikely to see a big uptrend due to its operation in a competitive, cyclical industry with persistent structural challenges. At best, it can hope to maintain its sales and, with favourable market conditions and effective risk management, achieve a reversion to mean profit levels in the future. This outlook reflects a focus on stability and resilience rather than aggressive expansion.
(3) Financial analysis
Balance Sheet Quality
The company has consistently maintained a strong balance sheet, characterized by its net-net current asset status throughout the years, reflecting a conservative financial approach. Its assets are highly liquid, providing a buffer against operational downturns, and the company has operated without relying on external financing, as evidenced by zero debt issuance. This lack of leverage has enabled resilience during periods of fluctuating sales and earnings. However, since 2022, net-net current assets have declined due to loss-making operations, capital expenditures (CAPEX), and dividend payouts. Despite this reduction, the balance sheet remains liquid, with no dependence on external finance, and the company has consistently paid dividends, demonstrating a commitment to shareholder returns. Overall, the balance sheet showcases financial stability and staying power, prioritizing liquidity over aggressive expansion.
Earnings and Cash Flow
The company’s earnings and cash flow profile is marked by significant variability, driven by its high operating leverage. In profitable years, it has achieved double-digit net income margins, while in challenging periods, it has faced negative gross margins, highlighting the cyclical nature of its business. Free cash flow (FCF) has primarily been allocated to dividend payouts, aligning with its shareholder-friendly approach. Total net income over the years is RM148 million, which falls between cash from operations (RM177 million) and FCF (RM131 million), indicating that earnings are supported by solid cash generation without significant accounting distortions. However, the company has not shown consistent pricing power or revenue growth, with performance fluctuating in line with market conditions. The current market price, near all-time lows and comparable to the COVID-19 era, reflects the market’s cautious view of its earnings volatility. Despite this, its ability to generate cash and maintain financial stability underscores a focus on operational resilience.
(4) Company characteristics
Strengths
Strong Balance Sheet: The company consistently maintains a net-net current asset status, reflecting a conservative financial approach. This high liquidity acts as a buffer against operational downturns and reduces financial risk, ensuring stability even in challenging times.
Financial Independence: Operating without external financing or debt, the company demonstrates remarkable financial stability. This zero-debt strategy eliminates interest rate risk and leverage-related pressures, enhancing its resilience.
Dividend Consistency: Despite fluctuating earnings, the company has a strong track record of paying dividends. This commitment to shareholder returns makes it appealing to income-focused investors seeking reliable payouts.
Operational Resilience: The company has proven its staying power by navigating cyclical market conditions effectively. Its ability to generate cash from operations (e.g., RM177 million) and maintain liquidity supports its long-term survival and operational health.
Weaknesses
Earnings Volatility: Due to high operating leverage, the company experiences significant earnings fluctuations—ranging from double-digit net income margins in good years to negative gross margins in bad years. This unpredictability can deter risk-averse investors.
Lack of Pricing Power: The company struggles to achieve consistent revenue growth or influence prices, suggesting it operates in a highly competitive market. This limits its control over profitability and growth potential.
Cyclical Exposure: Performance is heavily influenced by external factors such as economic conditions, raw material supply, and currency fluctuations. This cyclical nature increases vulnerability to market downturns beyond the company’s control.
Negative Market Perception: With its current market price near all-time lows, the company faces investor scepticism. This perception, driven by earnings volatility and lack of growth, may hinder its ability to attract new investors or raise capital.
(5) Valuation
The company presently maintains a robust financial position with a net cash reserve of RM68 million and no outstanding debt. Given the highly cyclical nature of its operations and its current loss-making phase, we conservatively designate 50% of this cash—amounting to RM34 million—as free cash, leaving the remainder as a buffer. Subtracting this RM34 million from the company’s current market capitalization of RM80 million results in an implied market value of the business of RM46 million. To support this valuation with a required return of 15%, the company would need to generate annual earnings of approximately RM7 million (RM46 million × 15%). Based on an average revenue of RM101 million over the period from 2020 to 2024, which includes two favorable and three challenging years, achieving RM7 million in earnings necessitates a net income margin of 7%. Historical data supports this target, as the company recorded a 7% net income margin in 2017, the lowest among its profitable years. This suggests that a 7% margin is reasonably attainable, particularly if market conditions turn favorable, rendering the valuation plausible rather than overly optimistic.
Alternative Valuation and Investment Perspective
An alternative approach to valuing the company involves using the average net income of RM11 million from 2011 to 2024, discounted at a 15% required return rate with no assumed growth. This method yields a business value of RM73 million (RM11 million / 15%). When combined with the excess cash of RM34 million, the total company valuation reaches RM107 million, representing a 34% premium over its current market capitalization of RM80 million. Despite the company’s inconsistent earnings trajectory and average business quality, the market appears to have undervalued it, potentially reflecting a depressed pricing level. This presents an attractive opportunity for investors to acquire the company at a discount, with its liquid and solid balance sheet offering resilience through cyclical downturns and the potential for upside should operational performance improve in the future.
End verdict
While the company’s stock may appear attractive due to its undervaluation, financial stability, and potential for growth in certain market conditions, it comes with significant risks that make it a challenging investment for many. The company operates in a highly cyclical industry, where earnings can swing dramatically—shifting from strong profits in good years to losses during downturns—due to its high operating leverage and exposure to unpredictable external factors like economic conditions, raw material costs, and currency fluctuations. Add to those intense competitive pressures from lower-cost producers and a lack of consistent pricing power or revenue growth, and you’ve got a recipe for earnings volatility that’s hard to stomach. This isn’t a business built for steady, reliable performance; its results are too tied to forces it can’t control.
For investors looking for long-term business strength and consistency, this stock is a poor fit—the risks far outweigh the rewards for that profile. However, for those with a high-risk tolerance and a longer investment horizon, there’s still a case to be made. The company’s undervaluation and solid balance sheet, bolstered by cash reserves, provide a buffer and a chance to profit if market cycles turn favourable. In short, this stock isn’t for the faint-hearted or those craving stability—it’s a bet for investors willing to ride out volatility and capitalize on potential upswings, fully aware that consistent performance isn’t in the cards.
