Polish Furniture Market: Time to turn the tables (Pfleiderer stays BUY, Forte downgraded to HOLD)

In this report, we reiterate our BUY recommendation on Pfleiderer (PFL), but reduce our price target (PT) to PLN 47/share vs. PLN 55 previously. On the other hand, we downgrade Forte (FTE) to HOLD from Buy and reduce our PT to PLN 55.0, from PLN 85.5. Both companies experienced a tough year in 2017, despite the strong macro and construction market, due chiefly to internal problems resulting from customer price pressure and the inability to fully pass higher materials and salary costs onto clients. However, we believe that both companies have overcome their internal problems with price adjustments and should start to deliver positive results dynamics soon, from 2Q18E, as chemicals prices are becoming more stable. Furthermore, wooden panel pricing should improve, as we can see that the pressure from cheap imports from Eastern Europe is slowly fading away. In our furniture market coverage, we prefer Pfleiderer to Forte, due to: 1) its more attractive valuation and dividend yield of 7%; and 2) its strong growth potential resulting from recovering pricing in the wooden panel market. We turn more cautious on Forte, due to: 1) the strong increase of the leverage to 4.1x on high capex and weaker results; and 2) the continuous furniture price pressure from the customer side. We remain optimistic on Forte's long-term strategy, but we believe its path will be tougher than we had assumed previously.