HeveaBoard’s 1H18 core net profit of RM4.2m (YoY: -89.8%) came in above our but below consensus expectations, accounting for 58% and 17% of our and consensus full-year forecasts. While revenue was dragged by lower sales from both particleboard and RTA segments as market sentiment remains weak, 2Q18 core earnings improved QoQ as prolonged labour issue was resolved. HeveaBoard declared a higher-than-expected DPS of 1.2sen. We increase our FY18-20 earnings forecasts by 15-33%. We maintain HOLD with a higher TP of RM0.85 based on 1.1x P/B ratio.

Above our expectation. 1H18 core net profit of RM4.2m (YoY: -89.8%) came in above our but below consensus expectation, accounting for 58% and 17% of our and consensus full-year estimates.

Deviations. Lower-than-expected operating cost (labour issue resolved).

Dividend. Declared a higher-than-expected 1st interim dividend of 1.2sen/share (ex-date: 12th September 2018).

QoQ. 2Q18 revenue fell by 8.3% due to lower sales from both particleboard and RTA segment. However, core net profit improved by 60.5% to RM2.6m from RM1.6m in 1Q18, mainly due improved margin as the labour shortage issue was resolved (resulted in fewer number of contract workers needed as foreign workers return).

YoY. 2Q18 core net profit plunged by 83.9% to RM2.6m, mainly due to (i) lower sales volumes (from both particleboard and RTA segment), (ii) stronger MYR against US$, and (iii) higher labour cost (foreign labour levy and contract workers due to shortage of foreign workers).

YTD. 1H18 revenue fell by 24.7% due to (i) weak market sentiment in the particleboard segment and (ii) inability to take up RTA orders due to lack of foreign workers. The lower revenue translated to a 89.8% weaker core earnings, earnings was further dragged by (i) higher raw material cost mainly rubber wood (which has increased by 17% YoY) and (ii) higher labour cost (newly implemented foreign labour levy).

Shortages of labour issue resolved. RTA segment’s PBT returned to the black (from LBT of RM1.4m in 1Q18), as the group has resolved the shortage of foreign labour issue which has been a struggle since 3Q17. The group has cleared all its backlog orders in end May 2018, and will see improved margin moving forward from this point onwards.

Forecast. We raise our FY18-20 earnings forecasts by 15-33% mainly to account for lower labour cost and we adjust for higher dividend pay-out assumption from 0.6 sen per share to 4.8 sen per share. We maintain HOLD with a higher TP of RM0.85 (previously RM0.83) based on a higher P/B ratio of 1.1x (previously 1x) as dividend payout has exceeded our expectation along with higher than expected earnings. On top of that, we do not foresee any further downward surprise in the near term, as the labour issues has been resolved.

Source: Hong Leong Investment Bank Research - 27 Aug 2018