Result

• Earnings significantly below our expectation. HeveaBoard Berhad (Hevea) registered 1Q18 core net profit of RM1.8m (after excluding realised and unrealised forex gain of RM0.8m during the quarter), which tumbled 92.9% yoy and 89.9% qoq. The dismal results were mainly due to significantly lower revenue achieved (-27.2% yoy, -13.0% qoq) and margins (PBT margin: -16.6ppts yoy, -5.6ppts qoq) by both of its Particleboard and RTA segments.

Comment

• Loss in RTA segment. The weaker yoy and qoq results in 1Q18 were mainly due to lower sales by its Particleboard segment (-23.6% y7y, -26.5% qoq) and RTA division (- 29.5% yoy, -0.6% qoq). This was also further aggravated by slump of margins for both segments as Particleboard’s PBT margin tumbled 11.5ppts yoy and 4.5ppts qoq whilst RTA posted a net loss of RM1.4m (vs 1Q17 net profit of RM17.4m and 4Q17 net profit of RM2.6m).

• Unfavourable forex and labour issues weighed on earnings. The weaker performance posted by Particleboard segment was mainly due to weakening of USD against MYR by almost 12% during the period, lower production volume and higher raw material costs (rubber wood prices, and glue and chemicals). Meanwhile, the disastrous showing by RTA segment was due to the continued shortage of foreign workers which resulted in high operational costs as the Group failed to achieve optimum production capacity. Also, the weakening of USD against MYR weighed on its top line and bottom line.

• Tough operating environment. We envisage the Group’s 2018F earnings continue to be affected by: 1) lower production and 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; 3) fluctuation in forex as raw material costs are mainly denominated in MYR whilst export proceeds are in USD; and 4) prevailing high rubber wood and glue prices following rainy season and hike in crude oil prices.

Earnings Outlook/Revision

• We slash our core net earnings estimates for 2018F and 2019F by respective 41.1% and 23.6% to RM42.4m and RM67.7m following cut in our sales and margin assumptions for the both segments due to the abovementioned headwinds.

Valuation/Recommendation

• We downgrade our call to HOLD from BUY with a lower target price of RM0.95 (RM1.27 previously) following our earnings cut. Our target price is now based on 8x 2019F fully-diluted PE.

Source: JF Apex Securities Research - 25 May 2018