Highlights

• A downstream plywood manufacturer… FLBHD manufactures and mainly exports its plywood to US, Korea, Taiwan and India.

• U.S. Recreational Vehicle industry outlook remains bright… Ci rca 64.9% of Focus Lumber Bhd’s total revenue in FY14 was derived from US market, most of which is to the RV industry in Elkhart, Indiana (the centre of the US RV market). The US RV market is expected to grow on the back of recovering US economy, we opine that demand for the Group’s plywood will increase in tandem.

• Beneficiary of strengthening USD… as most of its export revenue is sold in USD while production cost is settled in RM. Hence, this means significant boost to its earnings as RM has deprecated by circa 20% YTD. Given prospects of US interest rate hike; lower commodities prices; and lingering domestic concerns, the company is expected to continue enjoy translation gain from a strong USD.

• Lower raw material costs… in particularly, tropical log and adhesive prices (which collectively account for 60-70% of the production cost of Plywood).

• Ongoing efforts to improve quality and operational efficiencies and financial performance… Management will continue to work on improving the quality and operational efficiency of the production team.

• Strong balance sheet, with net cash of 82 sen and attractive 4.7% dividend yield… Focus Lumber Bhd presently has net cash per share of 82 sen or circa 48% of share price. Historically, the Group has annual free cash flow of circa RM11m-12m (or RM0.11-0.12 per share) and has been paying dividend consistently since list ing in 2011. As for FY2014, it paid total dividend of 8 sen, translating into 4.7% dividend yield.

Catalysts

• Sustained run-up in US RV industry;

• Margin expansion from stronger USD;

• Lower raw material costs;

• Ongoing efforts to improve quality and operat ional efficiencies and financial performance; and

• Net cash and attractive dividend yield.

Risks

• Fluctuating foreign currency movement (in particularly the USD);
• Slower-than-expected demand for plywood; and
• Escalating raw material prices and labour costs.

Forecasts

• None.

Valuation

• At current share price of RM1.71 per share, FLBHD is trading at 12M trailing P/E of 8.9x (vs. timber industry average P/E of 16.8x) or 47% discount, albeit its market capitalisation is significant smaller and do not have any timber concessions.

Source: Hong Leong Investment Bank Research - 9 Sep 2015