• A downstream plywood manufacturer. FLBHD (founded in 1980s) focuses on the manufacturing and sale of plywood and veneer, using the waste from its manufacturing activities to generate and sell electricity. FLBHD exports over 98% of its products, mainly to US (71% of FY15 revenue), Korea (12.4%), Taiwan (11.5%) and India (2.1%).

• Promising US Recreational Vehicle (RV) industry outlook.Approximately 70% of FLBhd’s FY15 revenue was derived from the US market, of which bulk of its plywood is catered to the RV industry. The US RV market is expected to grow positively on the back of recovering US economy, which bodes well for FLBHD’s plywood. According to the latest forecast from RVIA, the RV industry’s shipments will top 438,000 units in 2017, a 4.4% increase above the projected 2016 total of 419,500 units, the 8 th consecutive year of growth for the RV market.
   
• Riding on strong US$. As over 98% of its exports is denominated in US$ while about 80-90% of cost of sales is settled in RM, strengthening US$ bodes well for the bottomline (average RM/US$ has depreciated by 5.8% from RM3.90 in 2015 to RM4.13 YTD), given heightened prospects of Fed rate hike and sustainable US growth on the back of “Trumponomics”.
   
• Ongoing efforts to improve quality and operational efficiencies . In respond to the increasingly competitive market, FLBHD is currently in the midst of finalising a deal to acquire new machinery producing plywood with different sizes and specification, with the aim to increase the sales volume to US market with the production of these sizes of plywood as well as to reduce reliance on labour force.

• Expecting a strong showing in 4Q16 . Despite a weak core PATAMI in 3Q16 (mainly due to timing gap in shipment to US), we remain optimistic of a better 4Q16 results, underpinned by several positive factors including: (i) Weakening RM/US$ (slid 6.1% in 4Q16 to RM4.13 against average RM4.05 in 3Q16); (ii) Bright US RV industry outlook; (iii) Ongoing efforts to improve quality and operational efficiencies and (iv) Stabilizing ASPs. Hence, we expect FLBHD to record ~RM60m revenue in 4Q16, translating into a core PATAMI of RM6.6m, assuming a 11% net profit margin (slightly lower than average 11.9% in the last 4 quarters). All in all, FY16 revenue is expected to increase 9% yoy but core PATAMI will decline 19% yoy, predominantly due to reduction in sales volume, lower ASPs, higher overheads coupled with higher effective tax rates.

• Potential final dividend poser amid stronger 4Q16 and solid balance sheet with net cash of 85 sen (~52% of share price). Historically (excluding the outlier in FY15), the company registered operating netcash flow of 8-27sen/share and has been paying 6-8sen dividend consistently (15 sen in FY15) since listed in 2011. Last week, FLBHD declared a total dividend 6 sen for 9MFY16 on 15 Dec (ex-date 29 Dec).

• In anticipation of stronger 4Q16 results and its solid financial position, the company is capable of delivering another ~4sen final dividend, translating into a total 10sen for FY16 (i.e. 6.1% DY) or a dividend payout of 51% (still below 53%-65% range from FY11-15). Overall, we see limited downside risks for FLBHD, supported by the strong netcash/share of 85sen and interim 6 sen dividend. At RM1.62, FLBHD is trading at 1.06x P/B, 40% lower against its peers. In terms of P/E, FLBHD’s 8.3x FY16 P/E (Ex-cash, P/E is only 3.9x!) is trading at 26% discount to its peers’ 11.3x.

• Positive downtrend line breakout to spur share prices to retest RM1.73-1.95 zones. In view of the sluggish 3Q16 results, FLBHD’s share prices tumbled on 22 Nov from RM1.69 to a low of RM1.49 intraday before closing at RM1.55. Thereafter, the stock steadily climbed to RM1.62 on 19 Dec after announcing 6 sen interim dividend on 15 Dec.

• Ahead of the dividend ex-date and in anticipation of a strong 4Q16 results (to be released in Feb), FLBHD’s share price is poised to retest immediate resistance of RM1.73 (14 & 21 Nov high) following a downtrend line breakout yesterday. A decisive breakout above RM1.73 could take the next leg up towards RM1.84 (200-d SMA) before reaching our LT objective at RM1.96 (50% FR) levels. On the flip side, key supports are RM1.56 (20-d SMA) and RM1.50 psychological support. Cut loss at RM1.48.

Source: Hong Leong Investment Bank Research - 20 Dec 2016