4QFY19 core net profit of RM9.4m (QoQ: +189.8%; YoY: +266.8%) brought FY19 sum to RM15.7m (YoY: +63.3%) made up 163.7% of our FY19 forecasts, which was above expectations. The stronger than expected results were due to better production efficiencies in the RTA segment, which resulted in stronger than expected margins. Despite concerns over Covid-19, we raise our FY20/21 forecasts by 28.1%/22.4% to account for strong rebound in the RTA divisions’ profitability. Our TP of RM0.40 (0.5x FY20 BVPS) remains unchanged. Despite this, we raise our call from a Sell to a HOLD given the share price declined - 22.2% since our previous report back in 11/8/19.

Above expectations. 4QFY19 core net profit of RM9.4m (QoQ: +189.8%; YoY: +266.8%) brought FY19 core net profit to RM15.7m (YoY: +63.3%), which made up 163.7% of our FY19 forecasts. The stronger-than-expected results were due to better production efficiencies in the RTA segment, which resulted in higher-than-projected margins. Core PATAMI was arrived at after adjusting for foreign exchange gain of RM0.4m.

Dividend. Declared DPS of 1 sen going ex on 27 Mar 2020 (4Q18: 1.3 sen). FY19: 3.0 sen vs. FY18: 5.0 sen.

QoQ. Core net profit jumped 189.8% mainly due to better contribution from the Ready to Assemble division (RTA) division (+172.7% at the PBT level). Note that sales in the RTA division are typically strongest in 4Q and 1Q due to seasonality.

YoY. In spite of weaker particleboard contribution (-61.0% at the PBT level) which was due to lower selling price, core net profit surged 266.8% from strong rebound in the RTA division from better production efficiencies.

YTD. Top line decline of -6.5% was led by particleboard division sales shrinking - 19.8% due to soft market sentiment and resulting low selling prices. Note that particleboard PBT shrank from RM13.3m to RM3.2m (-76.2% at the PBT level) in FY19. Despite weaker sales, core net profit rose 63.3% due to the RTA division. RTA division’s PBT contribution increased 577.4% to RM15.3m due to (i) improved production efficiencies (ii) effective cost management and (iii) favourable USD/MYR exchange rate.

Outlook. While we expect the particleboard segment to remain profitable in FY20, chronically low ASPs will continue to plague industry players. Although 1Q is typically a strong quarter for the RTA segment from sales to Japan associated with the Japanese New Year, we expect the Covid-19 outbreak to put a dampener on sales this time around. Despite this, the group have displayed their ability to reduce defects and increase efficiency for their RTA products, which should lead to better profitability in the RTA division going into FY20. For the fungi cultivation business venture, we expect the business unit to continue to face teething issues in the production process and therefore, post losses for the time being.

Forecast. Despite concerns over the Covid-19 outbreak, we raise our FY20/21 forecasts by 28.1%/22.4% to account for strong rebound in the RTA divisions’ profitability.

Upgrade to HOLD. Our TP of RM0.40 (0.5x FY20 BVPS; -1.4SD) remains unchanged. Despite this, we raise our call from a Sell to a HOLD given the share price decline of -22.2% since our previous report back in 11/8/19.

Source: Hong Leong Investment Bank Research - 27 Feb 2020