Results

• Excluding RM3.1m one-off impai rment loss (on idle plants in Masai and Segamat), core net profit of RM95.7m came in below our expectation, accounting for only 94% of our forecast. Against the consensus, the results came in within, accounting for 97% of consensus forecast.

Deviation

• 2-month shut down in its Thailand biomass power plant in 4Q15, which resulted in RM2m losses.

Highlights

• Declared 1 sen interim DPS. Introduced dividend policy of minimum 25% from FY16 onwards.

• FY15 core net profit jumped to RM95.7m (from RM0.2m in FY14) mainly on the back of lower production cost (in particularly, glue and log), higher selling prices (arising from a stronger US$) and sales volume, as well as improved operational efficiency arising from restructuring of certain operational facilities in Malaysia.

• Although revenue rising by 4% to RM266.3m (mainly on higher sales volume), 4Q15 core net profit declined by 12.5% qoq to RM24.1m mainly on forex losses, a 2-month shutdown in its power plant (which has in turn resulted in RM2m losses and higher electricity costs).

• Briefing highlights: (1) Signs of demand pullback from the Middle East market; and (2) RTA expansion plan is on track, and benefits from its cost rationalizing initiatives has started kicking in which will result in greater cost savings by end-FY16 or early-FY17.

Risks

• Escalating raw material and labour costs;
• Slower-than-expected demand for MDF;
• Fluctuating foreign currency movement.

Forecasts

• FY16 core net profit forecasts lowered by 10.8%, to reflect a slightly lower ASP (in US$) assumption. FY17 core net profit lowered by 12.6%, to reflect a slightly lower ASP (in US$) assumption and a downward revision in our US$:MYR assumption (from RM4.00/US$ previously to RM3.80/US$), which more than offset higher sales volume assumptions (arising from production volume contribution from Masai plant, which the plant upgrade is expected to complete by end-FY16).

Rating

BUY

Negatives

• (1) High earnings sensitivity to exchange rate movement.

Positives

• (1) Healthy balance sheet; and (2) Rubber plantation land bank value has yet to be reflected in current share price valuation.

Valuation

• Post earnings adjustment, our TP was lowered by 12.6% to RM1.60 based on unchanged 11x revised FY17 EPS of 14.6 sen.

Source: Hong Leong Investment Bank Research - 1 Mar 2016