Heveaboard integrates ESG considerations in its operations through (i) resource efficiency and circularity in its manufacturing process; (ii) tracking and reducing carbon emissions; (iii) identifying the gaps and improving its labour practices; and (iv) compliance to the best practice in corporate governance. Its positive ESG initiatives demonstrate the management’s commitment as a responsible steward in creating long term shareholder value to the investors. ESG considerations also help the company to mitigate future physical and transition climate risks.

Environment: The future is circular. As the world transitions from linear to circular economy, we view that Heveaboard is ahead of the curve as it has successfully integrated circularity in its manufacturing processes. For its raw material sourcing, it primarily uses rubber wood, which are considered eco-friendly as they are (i) made out of waste (recycled rubber trees); and (ii) are sourced from plantation (vs. natural forest), where the trees can be replanted once they reached the end of its life cycle, making it a renewable source of raw material. Other than this, H eveaboard also recovers production waste such as rubber tree stumps, offcut wood slabs and rubber tree barks to be fed back in the manufacturing loop for other uses. Waste heat generated in production is also recovered to be used in other production process.

Tracking and reducing carbon footprint. Heveaboard recently received certification for its compliance to the ISO 14067:2018 standard which provides the standard and means to quantify the carbon footprint of products. Over the years, Heveaboard had been actively reducing the carbon emissions in its production through (i) recovering rubber wood stumps in the production of particleboards, which prevented 37.8k tonnes of carbon emission in FY20; (ii) installation of solar panels to power its plant which saved c.1.5k tonnes of carbon emission since Apr 2020; and (iii) production of flat packed RTA furniture that require less transportation trips compared to fully assembled furniture, thus, requiring less fuel consumption and less carbon emissions.

Social: Enhancing worker welfare and automation. Heveaboard is constructing a new hostel and is making continuous improvements to its existing hostels to enhance the living condition of its foreign workers as well as to comply with the Housing Act. Furthermore, Heveaboard has also been proactive in its response to Covid-19, for example, through conducting voluntary screening exercise on its employees. It is also embarking on process automation to reduce the reliance on labour.

Governance. We view Heveaboard’s board composition to be sufficiently diverse in age, ethnicity, gender and experience. We also find no material governance issue and view its corporate governance practice to be in line with the best practice in Malaysia.

Future-proofing the business. We believe that Heveaboard’s positive ESG initiatives will help it to future-proof its business from physical and transition climate risk. As a wood manufacturer, it is enjoying tax incentives from the government. Its carbon footprint tracking and emission reduction efforts also mitigate the risk and impact of the implementation of carbon tax in the future. Its proactive measures to close the gaps it identified in its labour practices and its efforts to enhance their welfare signalled its commitment to safeguard its labours’ interest.

Maintain BUY, TP: RM0.63. Maintain BUY with TP to RM0.63 pegged to P/B multiple of 0.85x based on FY22 BVPS. We believe that the investable universe of public companies in Malaysia that practice circular economy and resource efficiency remains limited. Heveaboard ESG profile would fit the bill for thematic funds that look for such investment opportunities. Given the positive ESG momentum of Heveaboard, we also do not discount the possibility of a rating upgrade by FTSE4GOOD in the future.

Source: Hong Leong Investment Bank Research - 7 Feb 2022