Result

• Core earnings within expectations. HeveaBoard Berhad (Hevea) recorded 2Q17 core net profit of RM16.8m (after incorporating forex loss of RM0.6m during the quarter), up 29.4% yoy but down 33.7% qoq.

• Cumulatively, the Group chalked up RM42.0m core earnings for 1H17, up 23.1% yoy, accounting for 44-45% of our and market full year estimates. Nevertheless, we deem the results in line even with the earnings shortfall. To recap, the Group achieved 41-44% of the actual full year earnings for its 1H2015 and 1H2016 results.

Comment

• Stronger yoy for the current quarter and 1H results. Hevea achieved better yoy quarterly results on the back of higher revenue, +11.1%. The particleboard segment played a crucial role in driving the Group’s overall performance with the segmental top line and bottom line surged by respective 9.9% yoy and 71.6% yoy. These were attributable to higher production, increased sales of higher grade products which outweighed the external headwinds such as lower USD against MYR and higher raw material costs in the likes of rubber wood, glue and chemicals. The same applies to the Group’s strong showing in 1H17. Meanwhile, the RTA furniture segment’s bottom line decreased by 42.0% yoy in spite of top line increasing 12.0% yoy no thanks to unfavourable forex and rising direct materials and labour costs.

• Lower qoq on seasonal effect. As expected, the Group recorded weaker qoq results as 1Q and 4Q are traditionally stronger. The better 1Q and 4Q are mainly due to financial year end closing for Japanese corporations in March (being its major export market for RTA furniture), Japanese New Year which falls on January 1, and strong demand for particleboard from China in relation to Lunar New Year celebration early of the year. As mentioned earlier, higher raw material costs and unfavourable forex also weighed on the qoq performance.

• High margin products and automation to further propel top line and improve operational efficiency. Moving forward, Hevea will continue its strategy of concentrating on selling of premium particleboard products, such as environmental and health-friendly specifications, E1, E0 and Super E0 which generate higher average selling prices (ASP) and margins. We understand that the Group has even started to produce non-added-formaldehyde (NAF), which is superior to the abovementioned grades in respect of quality and pricing. On the RTA furniture, the Group is focusing on automation and producing high value added products to capture more market share, enhance further its operational efficiency and hence drive cost savings. The Group is ready to take on more orders of new veneer-based products from Japan starting 2018 onwards with additional factory premises and production facilities to be completed by end 2017. The new RTA plant is believed to increase its existing furniture capacity of 7200 containers/year by 20% to 8640 containers/year and further lift the Group’s topline and bottomline by 11-12% for 2018F.
   
• Proposed interim dividend of 1.6 sen/share. Hevea has proposed an interim dividend of 1.6 sen/share for this quarter which will go ex on 20 Sept 17.

Earnings Outlook/Revision

• No change to our earnings estimates.

• We estimate the Group’s 2017F and 2018F core net earnings to trend upwards, growing by 23.2% and 15.4% respectively. We have yet to impute the earnings contribution from the new RTA plant.

Valuation/Recommendation

• Maintain BUY on HeveaBoard with an unchanged target price of RM2.12, based on 11x 2018F fully-diluted PE. The PER assigned for valuation is at the upcycle PE of small cap stocks.

• We like the stock for its: 1) resilient business model; 2) excellent track record against its peers; 3) commendable future earnings growth; 4) sturdy balance sheet with net cash of 18 sen/share; and 5) decent dividend yield of over 4%.

Source: JF Apex Securities Research - 25 Aug 2017