Saturday, March 31, 2012

Latitude Tree: If you continue to believe in US housing comeback

There is nothing fantastic about Latitude Tree except that it is a proven value stock. This furniture maker, with 95% of its market in the United States has a long proven history and yet it's stock price continue to be low. For example, the latest market value at the time of writing is RM62.7 million while its net asset alone is RM196 million - a 68% discount!

10 years Financials of Latitude Tree
In fact, I suspect the actual asset value could be worth more as some of its property assets were bought and valued during 2002. Land prices increased substantially since 2008 for both Vietnam and Malaysia. And Latitude Tree has massive land size in these two countries. I would suspect its properties in Vietnam alone would have been valued much more today as most of them were bought in 2002.

Besides properties, let's look at the the real deal - how sustainable is the business. There are not many small cap companies which I can highlight a 10-year financials, but for this one I feel obligated to do so. Why? Look at the trend.

For most part, it does not have a significant steady trend except Revenue, which has been on the steady rise - since 2002. Another positive trend - 2010 onwards, its operations in Vietnam has brought on much more revenue and profitability (ratio of 2.5:1) than Malaysia. This is mainly due to labour costs. Hence, Vietnam has become more important than Malaysia since.

It is however difficult to predict its profitability trend. One thing you notice is that for all the 10 years, it is profitable no matter how difficult certain years can be. As wood being the main raw material, is a commodity, its profitability can be affected by the fluctuation of raw material prices during the short period.

Its business is also seriously affected by the slow down in US housing market from 2008 until now. On top of that, US currency depreciation has also affected Latitude Tree badly. This is especially so for the last 2 quarters (1st and 2nd quarter 2012) results which are not shown here.

Despite the above, let's look at Latitude Tree as a company in a industry that is competitive.

  1. Where some its competitors has failed, Latitude Tree managed to prove otherwise. It managed to successfully adapt to the costs challenges in the industry by its ability to move to a lower costs country - Vietnam and be successful. It is always challenge when you move your base as quality and many other operational factors may affect business.
  2. The challenges that it faces because of United States as its only market does not too severely affect the company. Yes, profits dropped but it still managed to register profits despite all the setback. 
  3. This is added by the weakening of US Dollar by as much as >15% since end of 2010. Believe me, unless the dollar position are hedged, it will affect any exporters from Malaysia or Vietnam quite substantially. During the period of significant Dollar decline, exporters could be caught in situation where they provided quotations a month or two prior to the order and by then, Dollar already declined by 5% to 10%. These are also seen in the rubber gloves industry.
Now, all the bad news are or should already be in for Latitude Tree...I think. The question is for how long more, they will face challenges like this? US housing market has yet to pick up from its latest statistics although the labour market has shown signs of improvement. Will it pick up back? For sure, the housing market being such a significant contributor to the economy will not slump forever for such a big market like United States.

Another question, will US Dollar fall further? How much more will it drop?

These are questions that Latitude Tree cannot answer. What it manages to do is to pull through the tough times as it has proven in the past.

And the company is trading at a price which is much lower than its book value! This could be attractive enough.

Serious Investing!

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