Result

• Dismal 3Q17. HeveaBoard Berhad (Hevea) recorded 3Q17 core net profit of RM8.0m (after incorporating forex loss of RM1.0m during the quarter), tumbling 55.1% yoy and 52.5% qoq. This was on the back of decline in revenue (- 7.2% yoy and -12.8% qoq) as well as margin (PBT margin: -8.3ppts yoy and -6.5ppts qoq).

• Core earnings below expectations. For 9M17, the Group recorded RM50.0m core net earnings (-3.6% yoy) which accounted for 53% of our and consensus’ full year estimates (our expectation of 65-68% as 3Q is traditionally a soft quarter). The negative deviation was mainly due to lower-than-expected revenue coupled with higher-than expected operational costs.

Comment

• Slump in yoy and qoq. Hevea achieved a miserable 3Q17 results no thanks to drops in both top line and bottom line of its particleboard and RTA furniture business segments. Under the particleboard segment, the lower revenue (-6.5% yoy and -8.5% qoq) and PBT (-57.5% yoy and -58.3% qoq) were mainly due to annual preventive maintenance, higher raw material costs and higher forex loss (MYR strengthening against USD). Meanwhile, the shortage of foreign workers which resulted in higher operational costs as optimum production capacity could not be achieved has weighed on its RTA furniture segment with weaker revenue (-7.6% yoy and -16.0% qoq) and PBT (-59.0% yoy and -50.8% qoq).

• Labour issue and high rubber wood prices weigh on its short-term earnings outlook. Currently, Hevea is actively seeking solutions to tackle the issue of shortage of foreign workers for RTA furniture. The Group will continue to speed up its automation process and produce wider range and higher value added products to mitigate the negative impact. With the lingering labour issue, we doubt that the Group could take on more orders of new veneer based products from Japan starting 2018 onwards with additional production facilities which were completed in August. For the particleboard segment, Hevea strives to market its premium particleboard products which command better margins to cushion the impact of sticky raw material prices. We understand that the Group has commercialised the No Added Formaldehyde (NAF) particleboard production with regular orders and targets to supply to China market. Meanwhile, the mushroom operation is scheduled to start operation in Feb 18, and the factory is 80% completed.

• Impact of strengthening MYR against USD. Our sensitivity analysis indicate that every 1% strengthening of MYR against USD would reduce Hevea’s earnings by 6.6% for 2017-18 given other factors held constant.
• Proposed second interim dividend of 1.6 sen/share. Hevea has proposed a second interim dividend of 1.6 sen/share for this quarter which will go ex on 7 Dec 17.

Earnings Outlook/Revision

• We slash our earnings estimates for 2017F and 2018F by respective 30.6% and 25.7% to RM65.9m and RM81.41m after lowering our sales assumptions and margins for RTA furniture and particleboard.

Valuation/Recommendation

• Maintain BUY on Hevea with a lower target price of RM1.58 (previously RM2.12) following our earnings downgrade. Our fair value is based on 11x 2018F fully diluted PE.

• Medium-to-long-term outlook still intact. While the Group continues to face headwinds in the short-term, we reckon that Hevea is a fundamentally sound company underpinned by its: 1) excellent track record; 2) resumption of earnings growth in 2018F banking on sales of higher value-added and premium products; 3) sturdy balance sheet with net cash position; and 4) decent dividend yield of over 4%.

Source: JF Apex Securities Research - 24 Nov 2017