Result

• Earnings way below expectation. HeveaBoard Berhad (Hevea) recorded 3Q18 core net profit of RM2.4m (after excluding realised and unrealised forex gain of RM1.1m during the quarter), which tumbled 70.3% yoy and 29.7% qoq. Overall, the Group chalked up RM7.5m core earnings in its 9M18 results (-85.0% yoy), accounting for a meagre 37.5% of our full year core profit estimate. The lacklustre results were mainly due to weaker-than-expected margin (9M18 PBT margin: 3.2% vs our full year forecast of 4.7%) amid 9M18 revenue met our expectation after achieving 73% of our full year estimate.

Comment

• RTA Furniture segment weighed on qoq performance. RTA Furniture division failed to sustain its positive momentum in 2Q18 (after a turnaround in 2Q18 from 1Q18’s net loss) as segmental top line and bottom line were down by 15.6% and 83.3% respectively. The uninspiring results were mainly due to lingering foreign labour shortage issues which resulted in higher operational costs as optimum production capacity could not be achieved and firm orders not met amid improved performance in Particleboard segment (Revenue: +11.8%, PBT: +24.1%).

• Weaker yoy, as expected. The weaker yoy results were due to lower top line and bottom line of its two divisions - Particleboard’s revenue and PBT slid by respective 6.4% and 25.0%, whilst RTA Furniture’s revenue and PBT tumbled 20.1% and 90.6% respectively. The lacklustre performance of the Particleboard segment was due to soft market sentiment caused by the trade war between the US and China, weakened USD/MYR as well as the increase in raw material cost especially rubber wood. Likewise, the abovementioned reasons also weighed on the Group’s 9M18 performance.

• Proposed second interim dividend of 1.2 sen/share. Although the Group performed badly in its 9M18 results, Hevea still proposed a second interim dividend of 1.2sen/share (vs 1.6sen/share a year ago) for this financial year to reward its shareholders. This brought the total dividend declared to 2.4 sen/share (vs 3.2 sen/share a year ago).

• 4Q18 is expected to remain sluggish. We envisage the Group to continue facing headwinds such as shortage of foreign workers, overcapacity of particleboard and rising raw material cost. Despite USD has strengthened against MYR recently, we do not foresee Hevea’s immediate earnings to rebound strongly in the coming quarters, as the prevailing trade war between US and China coupled with additional particleboard capacities coming on stream which would pose a challenge to the Group.

Earnings Outlook/Revision

• We slash our core net earnings estimates for 2018F and 2019F by respective 44.8% and 54.8% to RM11.0m and RM18.1m following cut in our RTA Furniture sales and margin assumptions for the both segments.

Valuation/Recommendation

• Maintain HOLD on the stock with a lower target price of RM0.79 (RM0.85 previously) as we now peg our valuation at 1.0x P/B due to lack of earnings visibility for the stock.

Source: JF Apex Securities Research - 23 Nov 2018