2QFY19 core net profit of RM0.9m (QoQ: -58.9%; YoY: -72.0%) brought 1H19 core net profit to RM3.0m (-36.5%). This was below our expectations, making up just 23.2% of our FY19 forecasts. The shortfall in earnings was due to lacklustre performance in particleboard and RTA segments. We cut our FY19/20/21 earnings forecasts by 25.6%/20.3%/6.0% mainly to account for weaker particleboard and RTA segment performance. We lower our P/B multiple from 0.85x to 0.5x (-1.4SD below its 5 year average) due to the challenging market conditions for particleboard producers. After our P/B multiple adjustment, our TP falls from RM0.65 to RM0.40. We downgrade our call from a Hold to SELL.

Below expectations. 2QFY19 core net profit of RM0.9m (QoQ: -58.9%; YoY: -72.0%) brought 1H19 core net profit to RM3.0m (-36.5%). This was below our expectations, making up just 23.2% of our FY19 forecasts. The shortfall in earnings was due to lacklustre performance in particleboard (soft particleboard prices) and RTA segments (poorer than expected sales volume).

Dividend. Declared DPS of 1 sen going ex on 20 Sep 2019 (2Q18: 1.2 sen). For the full-year, we are projecting a total DPS of 3.6 sen, translating to a dividend yield of 6.4%.

QoQ. Total revenue declined by 11.4% to RM94m, as stronger sales from particleboard segment (+40.4%) was more than offset by seasonally lower sales from Ready to Assemble (RTA) segment. Weaker top line resulted in core net profit declining by 58.9% to RM0.9m. Note that the RTA division’s sales typically peak in 1Q and 4Q from sales to Japan market.

YoY. Core net profit dived 72.0% to RM0.9m, mainly on the back of lower earnings contribution from particleboard division (arising from lower particleboard prices) and losses in the RTA division.

YTD. Core net profit declined by 36.5% to RM3.0m. Robust performance from the RTA segment in 1Q19 cushioned weak 2Q19 earnings, resulting in significantly stronger RTA PBT of RM5.9m (vs RM0.4m in 1H18). This was due to higher sales volume and improved economies of scale arising from higher utilisation rate. In the particleboard segment, despite returning to profitability in 2Q19 (RM2.0m) from RM2.3 losses (1Q19) at the PBT level, overall losses in 1H19 was due to weak selling prices, lower sales volume and 3 weeks factory shut down in 1Q19.

Outlook. Despite rebound in QoQ particleboard performance as Heveaboard returned to operational profitability, we understand particleboard manufacturing remains challenging due to the glut of supply in the market. While we are positive on the fungi cultivation business venture in the long run, we expect the business unit to continue to face teething issues in the production process and therefore, post losses for the time being.

Forecast. We cut our FY19/20/21 earnings forecasts by 25.6%/20.3%/6.0% mainly to account for weaker particleboard and RTA segment performance.

Downgrade to SELL. We lower our P/B multiple from 0.85x to 0.5x (-1.4SD below its 5 year average) due to the challenging market conditions for particleboard producers. After our P/B multiple adjustment, our TP falls from RM0.65 to RM0.40. We downgrade our call from Hold to SELL.

Source: Hong Leong Investment Bank Research - 23 Aug 2019