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Tuesday, September 19, 2017

HeveaBoard - FY18 to be a Fruitful Year

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Highlights

  • We walked away from our small group meeting with HeveaBoard’s management feeling encouraged about the group’s near-term prospects.
  • Room for price adjustment… HeveaBoard currently exports circa 50% of its particleboard output to China. Management highlighted that there is room to raise its ASPs for particleboards to China, given the recent strengthening of yuan against US$. Besides, HeveaBoard is constantly working towards producing higher profit margin particleboard; it is one of the first two players in the market to introduce Non-Added Formaldehyde (NAF) Board, which will enable it to generate attractive profitability.
  • Better margin for RTA furniture… The new ready-to assemble (RTA) furniture plant has completed and started its trial production last week with earnings delivery expected by early FY18. This plant focuses mainly on veneer-based RTA furniture which is able to generate higher profit margin.
  • Tokyo 2020 acts as another catalyst… We believe there will be an increase in RTA sales by end-FY18 riding on preparation for Tokyo 2020 Olympics. Historically, sales volume growth tends to be higher 1-2 years before global sports events i.e. in FY14 for Rio 2016.
  • Cultivation of King Oyster Mushrooms by Jan-18… Heveagro will be able to harvest 3 tonnes of mushrooms per day. The company is looking to sell these mushrooms at around RM10/kg, a competitive price compared to the current market price of circa RM20/kg.
     
  • Labour and rubber logwood issue still linger… Post expansion, the group will need an additional 500 workers in order to achieve optimal production level. While the supply of rubber logwood had recovered in Jun-17, price has remained sticky on the high side at RM160/tonne. Nonetheless, the company has been constantly looking for opportunity to move up its value chain and enhance automation processes.
     
  • Our sensitivity analysis indicates that every 10 sen appreciation in ringgit against the US$ will decrease Hevea’s profit by 11% assuming a constant ASP.

Risks

  • 1) Highly dependency on foreign workers, 2) Escalating raw material price and 3) Fluctuation on foreign currency (US$).

Forecasts

  • Maintained.

Rating

BUY (  )
  • We continue to like HeveaBoard for its healthy and strong balance sheet (net cash/share of 10.32 sen as at 31 Mar 2017), generous dividend payout (dividend payout ratio of 45% in FY16), and its ongoing effort in creating higher margin products.

Valuation

  • Maintain BUY recommendation, with unchanged TP of RM2.19 based on 11x FY18 fully-diluted EPS of 19.8 sen.
Source: Hong Leong Investment Bank Research - 19 Sept 2017

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