Result

• Core earnings within our expectation. HeveaBoard Berhad (Hevea) registered 4Q17 core net profit of RM17.7m (after incorporating forex loss of RM2.9m during the quarter), down 30.0% yoy but up 122.4% qoq. For full year 2017, the Group recorded RM67.7m core net earnings, tumbling 12.3% yoy.

Comment

• Weaker yoy but better qoq, as expected. The lower yoy results for 4Q17 were mainly due to shortage of foreign workers at the RTA Furniture segment which had impacted the operation of the plant as optimum production capacity could not be achieved (segmental top line and bottom line down by 14.6% yoy and 80.6% yoy respectively). Furthermore, the higher raw material costs and weaker USD against MYR also weighed on the Particleboard segment with its segmental PBT down by 48.8%. Hence, the abovementioned hindrance which surfaced in 2H2017 also weighed on the Group’s full year 2017 results. As expected, Hevea achieved better qoq results mainly driven by its Particleboard segment as the planned annual preventive maintenance was completed in 3Q17.

• Proposed third interim dividend of 1.6 sen/share. Hevea has proposed a third interim dividend of 1.6 sen/share for this quarter. Todate, the Group has declared a total dividend of 4.8sen/share for 2017.

• Outlook remains challenging. We envisage the Group’s 1H2018F topline and bottmline to be affected by: 1) lower production (expecting 20% decline in its shipments) coupled with higher operational costs as failure to achieve optimum production capacity for RTA Furniture as a result of shortage of foreign workers; 2) lower utilisation rate and ASP expected for particleboard production due to overcapacity and price war (Hevea’s current utilisation rate for its particleboard production is still relatively high at c.90% as compared to previous c.100% and still manage to hold up its selling price well at this junction for its premium products); 3) unfavourable forex as raw material costs are mainly denominated in MYR whilst export proceeds are in USD coupled with realised or unrealised forex loss incurred (time lag of about 2-3 months for the Group to partially price in the forex factor to customers); and 4) prevailing high rubber wood prices following rainy season during end of last year.

Earnings Outlook/Revision

• No change to our core net earnings estimates for 2018F: RM71.9m (+6.2% yoy) and 2019F: RM88.6m (+23.2% yoy).

Valuation/Recommendation

• We keep our BUY call on Hevea with an unchanged target price of RM1.27. Our fair value is based on 10x 2018F fully-diluted PE in view of prevailing cautious sentiment on export counters and challenging industry outlook.

• 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 strong earnings growth in 2019F; 3) sturdy balance sheet with net cash position; and 4) decent dividend yield of c.7%. We advise investors to accumulate the stock as we see its value emerges following recent slump in share price.

Source: JF Apex Securities Research - 28 Feb 2018