KUALA LUMPUR: While the worst is over, the outlook on the wood manufacturing sector remains cloudy as the rising cost of raw materials and foreign labour shortage issues and a spotlight on foreign labour practices continue to weigh on its prospects, according to Hong Leong Investment Bank (HLIB) Research.

       "We believe that the worst is over for the furniture sector as a full lockdown similar to MCO1.0 and NRP Phase 1 likely can be averted.

       "Nonetheless, 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, while ESG concerns on the manufacturing sector labour practices also dampen investors’ sentiment in the near term," said the research firm in a report.

       Reiterating its "netural" rating on the sector, HLIB said key raw materials have been on an increasing trend since 4Q20 with glue cost in particular rising steeply due to the price increase in crude oil and urea.

       Meanwhile, furniture companies have been unable to scale up production due to labour shortage issues.

       HLIB added that the timeline of re-entry of foreign workers remains uncertain due to the tightening of standard operating procedures as a result of the 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," said HLIB.

       THe research firm's top picks for the sector are Evergreen and Homeritz .