Results

• Below Expectations. FY17 core net profit of RM60.9m (- 21.6%) came in below our expectation, accounting for 92% of our forecast.

Deviations

• Higher than expected operational cost

Dividend

• Declared interim dividend of 1.6 sen (ex-date: 21 Mar 2018) bringing YTD DPS to 4.8 sen, translating to a dividend yield of 4.0%. We are expecting for another round of dividend for FY17.

Highlights

• QoQ: 4Q17 core net profit increased by 52.1% to RM11.8m (from 7.7 in 3Q17), mainly due to higher sales volume (as labour issue was partially resolved since Oct 2017) and deferred tax credit. Despite the improvement in number of labours, RTA segment’s PBT margin remained low at 3.7% vs 4.9% in the preceding quarter as labour cost remains high.
• YoY: 4Q17 core net profit declined by 54.7% to RM11.8m, as deferred tax credit was more than offset by: (1) weaker US$ against the MYR; (2) Higher operating cost (arising from additional expenses incurred to hire contract workers in replacing the loss of foreign workers at the RTA segment) and (3) Higher raw material cost as log prices increased by almost 50%yoy.
• YTD: FY17 core earnings declined by 21.6% to RM60.9m, due to higher raw material and operational costs, as well as weaker US$ against the MYR.
• Outlook: We remain positive on HeveaBoard’s earnings outlook, underpinned by the commencement of i) additional premium RTA furniture line, ii) new agricultural business venture which is expected generate higher profitability as compared to its bread and butter (i.e. particleboard and RTA furniture) and iii) it continuous effort in looking for opportunity to move up its value chain and enhance automation process.

Risks

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

Forecasts

• We cut our FY18-19 earnings forecasts by 7.9% and 7.7% to RM73.5m and RM80.3m mainly to account for higher operational cost.

Rating

BUY (↔)

• We continue to like HeveaBoard for its generous dividend payout (minimum payout ratio of 30%) and its ongoing efforts in improvising its product quality (which will in turn further strengthen its position within the premium particleboard segment).

Valuation

• Maintain BUY recommendation with a lower TP of RM1.31 (previously RM1.42) based on 10x unchanged FY18 EPS of 13.1 sen.

Source: Hong Leong Investment Bank Research - 28 Feb 2018