Highlights

• HeveaBoard Bhd manufactures, trades and distributes a wide range of particleboard and particleboard-based products (in particularly, RTA furniture products).

• The switch in consumption trend for furniture products, coupled with the declining supply of tropical log wood bode well for processed wood products including particleboard, MDF, and RTA furniture, thanks to its competitive cost structure and pricing.

• HeveaBoard’s niche position as a premium particleboard will continue to benefit from the rising demand for premium particleboard arising from increasing awareness on environmentally friendlier products.

• HeveaPac is in the midst of setting up a new RTA manufacturing plant with additional capex of RM33.5m. Scheduled for completion and commercial production by end-FY17, the new RTA plant will diversify HeveaPac’s RTA furniture product range to veneer-based furniture products, which is expected to command better profitability.

• The company has all its costs denominated in MYR while approximately 92% of the company’s revenue is US$ denominated, making the company a beneficiary of the strong US$. Our house view is for ringgit to remain weak against US$ in 2H17.

• Strong balance sheet, bright earnings outlook, and absence of lumpy capex going forward indicate generous dividend payout. In our forecasts, we project DPS of 7.0-9.1 sen in FY17-19 (assuming 40% payout), translating to decent dividend yield of 5.3-6.9% p.a. in FY17-19.

• There is potential upside from new business venture, i.e. cultivation, packing, distribution and trading of gourmet fungi and agro products by utilizing current by-products as substrate.

Risks

• 1) Highly dependency on foreign workers, 2) Escalating raw material price and 3) Fluctuation on foreign currency (US$).

Forecasts

• We project FY17-18 net profit to increase by 16%-39% to RM93.9m and RM112.5m respectively, largely to account for higher ASP and profit margin assumptions.

Rating

BUY (New)

• We like HeveaBoard due to its healthy and strong balance sheet (turned net cash in FY 15), high dividend payout (dividend policy of not less than 30%), and it’s ongoing effort in creating higher margin products.

Valuation

• We initiate coverage on HeveaBoard with a BUY recommendation, with TP of RM2.19 based on 11x FY18 fully-diluted EPS of 19.8 sen.

Source: Hong Leong Investment Bank Research - 4 Jul 2017