KUALA LUMPUR: The worst is over for the furniture sector as a full lockdown similar to the Movement Control Order (MCO) 1.0 and the National Recovery Plan (NRP) Phase 1 likely can be averted, said Hong Leong Investment Bank (HLIB) Research.
Nonetheless, the research house said sector valuation remains undemanding at this juncture as persistent labour shortage and the elevated raw material costs continue to cloud the earnings visibility of the sector.
"The environmental, social governance (ESG) concerns on the manufacturing sector labour practices also dampen investors' sentiment in the near term," it said in a note today.
HLIB Research said all critical raw materials (rubberwood, glue, steel, foam, leather, packing materials etc.) were on an increasing trend since the fourth quarter (Q4) 2020.
It said glue cost, in particular, had seen a steep increase mainly due to the rise in crude oil price and the increase in urea price as demand for oil palm fertilizers increases.
Meanwhile, HLIB Research said the furniture manufacturing industry faces foreign labour shortage issues.
Despite having spare production capacity in their factories, furniture companies could not scale up their productivity due to the production bottleneck caused by labour shortage.
"We understand that the government has lifted foreign labour intake ban for all sectors, but the timeline of the entry remains uncertain due to the tightening of standard operating procedure (SOPs) on the entry of foreign workers as a result of the new Omicron variant.
"Nonetheless, should the foreign labour intake materialize, it would provide a shot in the arm for the furniture industry and would be a major catalyst to drive earnings growth in the sector going forward," it said.
HLIB Research has maintained its Neutral rating in the wood manufacturing sector.
"Our top picks for the sector are Evergreen Fibreboard Bhd and Homeritz Corp," it added.