HeveaBoard’s FY18 core net profit of RM9.2m (YoY: -85.7%) came in below ours and consensus forecasts, accounting for 88% of full-year estimates, respectively. Earnings were dragged by lower sales from both particleboard and RTA segments as market sentiment remains weak. However, moving forward we opine that the continuous improvement in the RTA segment will cushion the weak particleboard market. We cut our FY19-20 earnings forecasts by 25/22%. We maintain HOLD with an unchanged TP of RM0.65 based on 0.85x P/B ratio.

Below expectation. FY18 core net profit of RM9.2m (YoY: -85.7%) came in below ours and consensus forecasts, accounting for 88% of full-year estimates, respectively. The downward surprise was a result of higher operating cost.

Dividend. Declared 3rd interim dividend of 1.2sen/share (ex-date: 13th March 2019). Bringing YTD dividend to 3.6sen/share. For full year we are projecting a total DPS of 4.8sen (which includes a pending final dividend) translating to a yield of 5.5%.

QoQ. 4Q18 revenue rose by 24% due to sales pick up from RTA segment (seasonal factor). However, core net profit declined by 21.7% to RM2.2m, due to weaker margin from the particleboard segment mainly led by competitive pricing.

YoY. 4Q18 revenue was down by 5% due to weak particleboard market sentiment as a result of the US-China trade war (particleboard mainly export to China). In tandem, core net profit plunged by 85.7% mainly due to (i) lower sales volumes, (ii) lower ASP of particleboard (PB) and (iii) increase in cost of direct raw material.

YTD. FY18 revenue fell by 17.5% to RM9.2m as a result of (i) weak contribution from both particleboard and RTA segment. The lower revenue translated to a -85.7% weaker core earnings which was further dragged by higher labour cost from newly implemented foreign labour levy, employed contract workers (lack of foreign labour), increased in cost of direct raw material.

Lucky to have RTA operation. To recall, HeveaPac’s operation was negatively impacted starting 3Q17, where the group lost a large number of foreign workers. The RTA segment’s margin started declining since then, due to higher operating cost as a result of hiring contract workers. As the group cleared off its backlogged orders and contract workers, we started to witness margin recovery in RTA segment. We are positive that the RTA segment’s margin will continue to improve as cost per unit will be lowered, and thus will be able to cushion the weak particleboard segment.

Forecast. We cut our FY19-20 earnings forecasts by 25/22% mainly to account for lower sales and selling price in the particleboard segment. We maintain HOLD with unchanged TP RM0.65. Our valuation is pegged to 0.85x P/B (-0.5SD below 5 years average).

Source: Hong Leong Investment Bank Research - 1 Mar 2019