HLBank Research Highlights
Wood-based Manufacturing - Favourable Move for Furniture Players
Highlights
- Rubberwood export ban. The government announced that it will ban the exports of rubberwood effective 1 Jul 2017, to address the shortage of raw materials faced by Malaysia’s furniture industry.
- Malaysia’s rubberwood exports have grown by a CAGR of 13.9% from 2010-2016 (Figure 1). Apart from rising rubberwood exports, we note that the rise in rubberwood prices YTD was also driven by less-than-favourable weather condition, which has resulted in rubberwood shortage and higher rubberwood prices YTD. This has, in turn, resulted in higher production cost among the wood-manufacturing players in Malaysia.
- All-in-all, we opine that the latest development is positive to wood-based manufacturers in Malaysia, as the ban on rubberwood will alleviate supply shortage of rubberwood in the country, hence easing the raw material cost pressure.
- Outlook remains bright in 2H17. We believe earnings prospects of the wood-based manufacturing players remain bright in 2H17, underpinned mainly by continued weakness in MYR (as bulk of the players’ earnings are denominated in US$) and lower raw material cost (as the supply of rubberwood will now increase domestically).
- Evergreen: We continue to remain positive on Evergreen mainly on the back of its turnaround plan and the commissioning of the second RTA line. The sustained US$ strength (ringgit weakness) will directly contribute to the topline positively.
- Homeritz: We continue to remain positive on Homeritz as the company is still on expansion mode. We believe that sustained US$ strength (ringgit weakness) will provide a favourable environment for Homeritz to mitigate rising cost of doing business.
Catalysts
- Strengthening of the greenback (further tightening by the US Fed).
- Firmer global economic growth.
Risks
- 1) Sharper-than-expected ringgit appreciation, 2) Escalating raw materials and labour cost, 3) Weaker than expected export demand, and 4) Trade protectionism.
Rating
OVERWEIGHT ↔
- We have an OVERWEIGHT rating on the sector, having a view on subsiding raw material cost. We believe that strong USD trend will provide a favourable environment for the wood product exporters to mitigate rising cost of doing business.
Top Picks
- We maintain our BUY recommendation on Evergreen with a TP of RM1.05 (based on 11x FY17 core EPS 9.6 sen).
- Reiterate our BUY recommendation on Homeritz with a TP of RM1.18 (based on 11x CY18 core EPS 10.7 sen).
Source: Hong Leong Investment Bank Research - 30 Jun 2017
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CS Tan
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If the raw material is rubber wood, the shortage is permanent. Why so ? Refer to RRIM Statistic here : http://www.lgm.gov.my/nrstat/nrstats.pdf
Malaysia no longer the world leader in exporting raw unprocessed rubber. We are importing raw rubber from countries like Thailand, Vietnam & Gold Coast ( West Africa ), etc.
There is a demographic change from rubber cultivation to palm oil. Every 10 holder small holding of rubber farmers, when the old trees felled, almost 9 out of 10 farmers will replant it with palm oil. Reasons being :-
1. Rubber tress has longer maturity period, 6-7 years as compare to palm oil which only takes 3-4 years. Old people said, cannot wait to reap the planting of rubber trees, anything can happens in the 6-7 years. Palm oil, at least wait 3-4 years only.
2. More physical labor required. Rubber tress are tap as early as 3 am in the morning & latex collection before 12 pm. The tapping on the same tress are carried out on alternate day / 15 days per month / 30 days per 2 months. Palm oil upon maturity, you only harvest once 20 days , 3 times in 2 months. The harvester can be hired, farmers only sit on motorbike or ATV to look see, look see. Imagine the amount of time & hard work reduces in rubber & palm oil cultivation.
3. During raining season, the farmers have battle against the rain as the rain will jeopardize the harvesting process or dilute the concentration of the latex which will resulted in poorer grading / selling price. Whereas for palm oil, rain are welcome any day & any time.
4. Rubber got wintering process. During the time from early of the year, around Feb to May annually, the rubber trees leaves will fall. Rubber farmers do not tape the rubber during this period if the trees are young ( old trees they will just wallop coz the trees will be fell soon ). From Feb to May annual, there will be disruption of income for rubber farmers. Whereas for palm oil, it is constant year of harvest, no disruption of the harvesting.
5. Rubber harvesting process are taking long time & farmers are subjected to mosquito biting, latex sticking to skin / hair (free waxing) & offensive odor. For palm oil harvesting, the harvester can be hired. The farmers only sit on motorbike or ATV to look see, look see. Imagine the amount of time & hard work reduces in rubber & palm oil cultivation.
In the years to come, more and more rubber farms will be replanted by palm oil. The supply scarcity is permanent due to demographic change on the nature of rubber cultivation vs palm oil cultivation. Just drive around all the famous rubber townships nowadays vs the time of 80s to 90s, you see more palm oil farms compare to rubber farms.
It is inevitable because farmers are getting smarter.
2017-07-02 07:43