HeveaBoard’s 9M18 core net profit of RM7.0m (YoY: -85.7%) came in above our but below consensus estimates, accounting for 84% and 50% of our and consensus full-year forecasts. Earnings were dragged by lower sales from both particleboard and RTA segments as market sentiment remains weak. HeveaBoard declared a DPS of 1.2sen. We increase our FY18-20 earnings forecasts by 25/9/19%. We maintain HOLD with a slightly higher TP of RM0.85 based on 1.1x P/B ratio.

Above our expectation. 9M18 core net profit of RM7.0m (YoY: -85.7%) came in above our but below consensus forecasts, accounting for 84% and 50% of our and consensus full-year estimates. The upward surprise was a result of lower-than-expected operating cost.

Dividend. Declared 2nd interim dividend of 1.2sen/share (ex-date: 5th December 2018). For full year we are projecting a total DPS of 4.8sen which translates to a dividend yield of 5.5%.

QoQ. 3Q18 revenue fell by 4% despite improved USD against MYR (2Q18: RM 3.94/USD vs 3Q18: RM4.08/USD) due to lower sales from RTA segment (seasonal factor). However, core net profit improved by 7.5% to RM2.8m, thanks to better sales mix which improved gross profit margin by 0.7%-pt.

YoY. 3Q18 core net profit plunged by 63.8% to RM2.8m, mainly due to (i) lower sales volumes of RTA, (ii) lower ASP of particleboard (PB) and (iii) stronger MYR against USD.

YTD. 9M18 revenue fell by 21.6% as a result of (i) weak particleboard segment and (ii) inability to take up RTA orders due to lack of foreign workers. The lower revenue translated to a 85.7% weaker core earnings, as earnings was further dragged by higher labour cost from newly implemented foreign labour levy and previously employed contract workers.

Upcoming stronger RTA sales will cushion weak PB sales. The slow take up rate on RTA sales this quarter cannot fully reflect the company’s recovery speed as 3Q sales is usually lower due to seasonal factor. We are expecting a 20-25% growth in RTA sales for the upcoming quarter (4Q18), with improved margin as cost per unit will be lowered.

Forecast. We raise our FY18-20 earnings forecasts by 25/9/19% mainly to account for lower operating cost from RTA segment.

We maintain HOLD with a slightly higher TP RM0.85 (previously RM0.83). Our valuation is pegged to 1.1x (5 years average PB ratio). We like Heveaboard for its (1) strong balance sheet, (2) good dividend payout, (3) diversified business, and (4) on going initiatives to move up the product chain.

Source: Hong Leong Investment Bank Research - 23 Nov 2018