Result

• Earnings fell short of expectation. HeveaBoard Berhad (Hevea) recorded 2Q18 core net profit of RM3.4m (after excluding realised and unrealised forex gain of RM1.1m during the quarter), which declined 79.9% yoy but improved 87.7% qoq. Overall, the Group chalked up RM5.2m core earnings in its 1H18 results (-87.7% yoy), accounting for a meagre 12% of our full year core profit estimate. The sluggish results were mainly due to significantly lower-than-expected margin (1H18 GP margin: 7.7% vs our forecast of 13.1%) coupled with lower-than expected topline achieved (1H18 revenue constitutes 44% of our full year estimate).

Comment

• Qoq improvement but still not good enough. We witnessed Hevea’s 2Q18 core profit improving qoq thanks to uptick in GP margins, +2.0ppts, amid lower revenue achieved, -8.3%. The better performance was mainly driven by its turnaround of RTA Furniture, which returned to the black during this quarter from 1Q18’s net loss, with easing labour shortage issue.

• Lower yoy, as expected. The weaker yoy bottom line was mainly due to lower top line, -21.7% (Particleboard segment and RTA Furniture division posted a sales decline of over 20% each), coupled with weaker GP margin achieved, -9.9ppts. The lacklustre performance of the Particleboard was due to soft market sentiment, weakened USD/MYR of c.9% as well as increase in raw material cost especially rubber wood (+17% yoy). Meanwhile, the continuous shortage of foreign workers resulted in high operational costs as optimum capacity could not be attained and sales orders not being met.

• Proposed first interim dividend. Although the Group performed badly in its 1H18 results, Hevea still proposed a first interim dividend of 1.2sen/share (vs 1.6sen/share a year ago) for this financial year to reward its shareholders.

• Short-term headwinds stemming from overcapacity of particleboard and rising raw material cost. Despite USD has strengthened against MYR recently and easing of labour issue, we do not foresee Hevea’s immediate earnings to rebound strongly in the coming quarters, albeit worst is over, as the Group still requires some time to ramp up its RTA Furniture production to achieve optimal capacity and regaining trust from its clients for new orders. Furthermore, we expect its Particleboard segment could face some pressure in respect of its ASP and a lower utilisation rate due to additional capacities coming on stream from Malaysia and Thailand coupled with price competition in low-end products. Besides, the prevailing high rubber wood and glue prices (as a result of sticky latex prices and recovery in crude oil prices) also weigh on its earnings prospects.

Earnings Outlook/Revision

• We slash our core net earnings estimates for 2018F and 2019F by respective 52.9% and 40.9% to RM20.0m and RM40.0m following cut in our sales and margin assumptions for the both segments.

Valuation/Recommendation

• Maintain HOLD on the stock with a lower target price of RM0.85 (RM0.95 previously) following our earnings cut. Our revised target price is now pegged at 12.0x 2019F fully-diluted PE.

Source: JF Apex Securities Research - 27 Aug 2018