We expect FLB’s earnings to rebound strongly in 4QFY21 to achieve a CAGR of 54% for FY21-FY23, driven by the promising growth in the buoyant RV sector and US housing market. Valuations are undemanding at 6.3-5.7x FY22-23 P/E, supported by attractive dividend yield of 6.4%-7.0% FY22-23. We value FLB at RM1.98/share based on 8.6x FY22 EPS of 23sen (average 10Y P/E), which is about 34% discount to peers average of 13.2x.

Background. Focus Lumber Bhd (FLB) is principally engaged in the manufacturing and marketing of plywood, veneer and Laminated Veneer Lumber (LVL). Plywood is the core product that generates the major revenue (c.98% in FY20) to the company through exporting to the US, Taiwan, Thailand, and others. The bulk of FLB’s plywood is exported to the recreational vehicle (RV) sector, accounting for c.50% of its plywood sales.

Positive spillover from US and Canada “lumber war”. We see FLB as the prime beneficiary of orders’ diversification amid the recent US and Canada “lumber war”. Canada is the main exporter of plywood to the US and the former is also the largest softwood lumber exporter in the world – it has been imposed a higher average duty of 17.9% on softwood lumber imports to the US (twice the previous rate of 8.99%). Coupled with US’ ongoing trade spat with China, this will likely result in US importers diverting their timber products from Canada to elsewhere – such as Malaysia, Vietnam and Indonesia – amidst booming housing demand in US.

Sustainable high plywood prices throughout 2022. With the combination of limited existing home inventory in the US and solid buyer demand, this has driven the need for new housing construction to pick up, which has in turn increased the demand for plywood – a component widely used in housing internal structures. Despite rising mortgage rate in anticipation of rate hikes in 2022, we remain optimistic that the US housing market will stay healthy given the low home inventory and the change in the mind set of homebuyers due to WFH culture. The strong pent-up and demographic demand of US housing that pushes its housing starts significantly higher will keep plywood demand buoyant and its prices stiff. Therefore, we expect FLB average plywood selling prices to rise significantly in FY22 from USD569 to USD670 per m3, and subsequently drop marginally to USD630 per m3 in FY23. This is higher than FLB’s FY15-FY19 average plywood selling prices of USD572 per m3.

Robust RV outlook. The demand for recreational travel and recreational vehicle (RV) has been robust as RVs provides an opportunity for people to continue to enjoy vacations while adhering to social distancing. RV Association projects RV shipment in US to grow exponentially (by a whopping 40%) to 602k units in 2021, and the shipment will grow further to 613.7k units in 2022, as more Americans are planning on RV trips in 2022. As such, we believe the increasing trend in RV demand will propel FLB’s earnings to greater heights, thanks to its strong presence in this industry (c.50% of its FY20 plywood sales) alongside its product quality and track record.

Forecast. We project FLB to register a sustainable turnaround from 4Q21 onwards, supported by (i) bullish plywood product prices, and (ii) ramped up delivery due to accumulated backlog. All in, we are projecting FLB’s FY21-23 core PATAMI to experience a strong CAGR of 54% to RM27.1m in FY23.

Fair value of RM1.98. We value FLB at RM1.98/share based on 8.6x FY22 EPS of 23sen. We believe FLB deserves a re-rating in its share price given its (i) strong balance sheet; (ii) consistent dividend payout and (iii) better earnings prospect. At a 40% dividend payout ratio (based on historical trends), this translates to an attractive dividend yield of 6.4%, 7.0% for FY22-23.

Source: Hong Leong Investment Bank Research - 8 Feb 2022