HeveaBoard’s 1Q18 core net profit of RM1.6m (-89.4%QoQ, -93.8%YoY) came in below ours and consensus expectations, accounting for 4% and 3% of ours and consensus full year earnings estimates. Earnings were dragged by lower sales volume and higher-than-expected operating cost. In view of the on-going shortage of labour issue coupled with the possible lower ASP moving forward, we cut FY18-20 earnings forecast by 73-85%. Given its weak earnings visibility and expensive valuations, we change our valuation from P/E ratio to P/B ratio. We downgrade to SELL from HOLD with a lower TP of RM0.83

Below expectation. 1Q18 core net profit of RM1.6m (qoq: -89.4% yoy: -93.8%) came in below our and consensus expectations, accounting for only 4% and 3% of our and consensus full-year estimates.

Deviations. Higher-than-expected operating cost (in particularly, labour cost).

QoQ. 1Q18 core net profit plunged by 89.4% to RM1.6m (from RM15.3m in 4Q17), mainly due to i) lower particleboard sales volume (arising from festive season), ii) higher labour cost (foreign labour levy) and iii) stronger ringgit against the US$.

YoY. 1Q18 core net profit plunged by 93.6% to RM1.6m, was mainly due to i) lower sales volume (as the group was still facing labour issue) ii) higher labour cost (foreign labour levy) and iii) stronger ringgit against the US$.

Severe shortage of labour. RTA segment’s PBT turned into red (from PBT of RM2.7m), as the group was hit by shortage of foreign labour since 3Q17, which has resulted in higher operating cost (as HeveaBoard had to resort to hiring contract labours in order to fulfil its order backlog).

May be affected by the particleboard price war soon… HeveaBoard may be impacted by the particleboard price war as the price war at grade E2 space may eventually have a spillover effect to premium grade particleboard segment (which is HeveaBoard’s forte), given that the price gap between the low-value segment and premium segment have widened significantly.

Forecast. We cut our FY18-20 earnings forecast by 73-85% mainly to account for lower ASP and higher raw material cost. Post downward earnings adjustment, we switch our valuation methodology on HeveaBoard to P/B (from P/E) as the P/E is no longer a fair valuation methodology post earnings downgrade. Correspondingly, our TP on HeveaBoard is lowered by 14% to RM0.83 (from RM0.97 previously) based on 1x P/B. We downgrade our rating on the stock from HOLD to SELL given its weak earnings visibility and expensive valuations (at current share price of RM0.97, Heveaboard is trading at FY18 P/E of 75.4x).

Source: Hong Leong Investment Bank Research - 25 May 2018