Highlights

• Outlook remains stable for 2018. We opine that the market has overreacted to the USD-MYR movement. If we track back to 2016’s earnings when the exchange rate was averaging at about MYR4.14/USD for the year, most of the wood based manufacturers under our coverage delivered decent profit margin.

• Hike in resin price is over. HLIB’s in house view is that oil price will maintain at its current range (2018: USD55- 65/barrel), hence we believe that resin prices will maintain at its current level and not rise further.

• Lii Hen: We remain positive on Lii Hen’s earnings outlook underpinned by: 1) diversifying away from wood based products to strengthen its market position, 2) secured sales up to April 2018 (more than 30% hedged) and 3) looking for automation opportunity for its existing production line.

• HeveaBoard: We remain positive on earnings mainly underpinned by 1) its previous investment that is paying off well, 2) HeveaGro business to start contributing and 3) Olympic 2020 sales to start flowing in by 2H18.

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

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

Risks

• (1) Sharper-than-expected MYR appreciation, (2) Escalating raw materials and labour cost, (3) Weaker than expected export demand and (4) Political issues in the US.

Rating

NEUTRAL ↔

• We downgrade our rating to NEUTRAL from OVERWEIGHT as the sector is hit my uncontrollable macro factors of weaker USD which provides an unfavourable environment for the wood product exporters.

Top Picks

• Lii Hen (BUY ↔ ) We reiterate BUY with an unchanged target price of RM4.27 based on 10x FY18 EPS of 42.7 sen.

• HeveaBoard (BUY ↔ ) We reiterate BUY with an unchanged TP of RM1.42 based on 10x FY18 EPS of 14.2sen.

• Evergreen (HOLD ) We downgrade our recommendation to HOLD from Buy previously with a lower target price of RM0.62 (RM0.95 previously) based on 10x FY18 EPS of 6.2 sen.

• Homeritz (HOLD ) We downgrade our recommendation to HOLD from Buy previously with a lower target price of RM1.00 (RM1.18 previously) as we roll forward to CY18 based on CY18 EPS 9.97sen.

Source: Hong Leong Investment Bank Research - 16 Jan 2018