• Business profile. Hevea manufactures and exports particleboard and readyto- assemble (RTA) furniture. Over 90% of its revenues are US$-based, while its cost is RM-based. It major markets are Japan, China, Korea, India, Australia and US.

Negatives

• largely discounted. YTD, share price tumbled 28% to RM1.17 (underperforming the KLCI by almost 30%-pts), mainly on a stronger MYR (against the US$). While we are cognizant that a sharp recovery in RM (again the US$) does not bode well for exporters ’ earnings growth, we believe recent selldown is overdone due to the following:

i. HEVEA is more than a US$ play, given strong consensus earnings CAGR of 13% for FY15-17, underpinned by its ongoing cost rationalization exercise and investment into new RTA production line as well as continuing focus on producing wider range of higher value products ;

ii. Current valuation of 5.2x FY16 P/E is attractive ( vs its neares t peer’s EVERGREEN 7.9x) and its 10-year historical P/E of 8x;

iii. The negative USD weakness factor has largely priced in, as reflected by s tabilization in HEVEA’s s hare price vs USD chart (FIG3); and

iv. Hevea is also expected to benefit from the rebuilding in Japan in the aftermath of recent earthquake given that the company exports ~50% of its products to the country.

• Poised for a downtrend line breakout. Having corrected 35% from 52-week high of RM1.79 to close at RM1.17 last Friday, we believe HEVEA is at the tail end of its 2-month sideways consolidation. A decisive breakout above RM1.22 (30-d SMA) will spur prices higher towards next targets at RM1.26 (50-d SMA) and RM1.37 (38.2% FR) before reaching our LT objective near RM1.45 (50% FR). Key supports are RM1.11-1.15. Cut loss at RM1.09.
• Attractive risk to reward ratio with 23.9% upside against 6.8% downside. All in, we see a good risk to reward ratio for investor with a theoretical entry price of RM1.17 given that the downside to the cut loss zone of RM1.09 is 8 sen (-8%) while the upside to the LT target of RM1.45 is 28sen (+23.9%).

Source: Hong Leong Investment Bank Research - 18 Apr 2016