Highlights

• Booster from strong US$. Most wood-based manufacturers experienced better financial performance in 2016 mainly on the back of weak MYR as most of exporters’ sales are predominantly denominated in the greenback.

• Outlook remains bright in 2017. We believe earnings prospects of the wood-based manufacturing players will remain bright in 2017 (if not brighter), underpinned mainly by continued weakness in MYR, which bodes well for the manufacturers’ margins.

• Gradual recovery from labour shortage. We understand that hiring freeze has ended and the sector is slowly recovering from the foreign labour shortage woes . As such, we do not expect the new foreign labour rulings to significantly dent the industry outlook.

• Minimal impact from Employer Mandatory Commitment (EMC) . We note the latest developments, i.e. employers to pay labour levy by 2018, have minimal impact on wood based manufacturers under HLIB’s coverage, as manufacturers have been gradually reducing their reliance on foreign labour.

• Evergreen: We remain positive on Evergreen’s earnings outlook, underpinned by 1) ongoing cost rationalisation exercise, which will improve production efficiency; (2) investment into RTA furniture production line; and (3) a beneficiary of weak MYR.

• Homeritz: We remain positive on Homeritz’s earnings outlook, underpinned by 1) lower raw material cost 2) rejuvenation in shortage of foreign labour 3) a beneficiary of weak MYR.

Catalysts

• The strengthening of the greenback (further Fed interest rate hike expectations)

• Global economy is expected to pick up pace this year

Risks

• Sharper-than-expected ringgit appreciation

• Escalating raw materials and labour cost

• Weaker than expected export demand

• Political issues in the US

Rating

OVERWEIGHT ↔

• We have an OVERWEIGHT rating on the sector, despite having a view on rising raw material cost, as we believe that stronger USD trend will provide a favourable environment for the wood product exporters to mitigate rising cost of doing business.

Top Picks

• Evergreen (BUY) TP is raised by 2% to RM1.51 post earnings adjustment, based on 11x FY17 revised EPS of 13.7 sen.

• Homeritz (BUY) our TP is raised by 4% to RM1.15 post earnings adjustment, based on 11x FY17 revised EPS of 10.4 sen.

Source: Hong Leong Investment Bank Research - 12 Jan 2017