Result

• Earnings exceed expectation. HeveaBoard Berhad (Hevea) recorded 4Q18 core net profit of RM6.4m (after excluding realised and unrealised forex gain of RM0.6m during the quarter), which tumbled 63.6% yoy but soared 172.6% qoq. Overall, the Group chalked up RM14.0m of core earnings in its 2018 results (-79.4% yoy), exceeding our full year core profit estimate of RM11m. The surprisingly strong 4Q18 results were mainly due to better-than expected revenue as well as gross profit margin.

Comment

• Weaker yoy performance. The Group recorded lower yoy results mainly dragged by poor performance under the Particleboard segment (segmental revenue: -20.1%, PBT margin: -7.6ppts) as affected by overcapacity issue, prevailing US-China trade war coupled with rising raw material costs. Moreover, the write-down of slow-moving inventory at the RTA Furniture segment also weighed on the Group’s bottomline.

• Stronger qoq results. Hevea achieved better 4Q18 as compared to the previous quarter mainly due to commendable performance shown by the RTA Furniture segment (segmental revenue: +44.7%, PBT: +433.3%). In addition, earnings in this quarter was further lifted by favourable tax credits, i.e. unabsorbed capital allowances, investment tax allowance, reinvestment allowance and unutilised tax losses available to offset against the taxable statutory income.

• Lower full year, as expected. For the full year of 2018, Hevea posted a dismal result with the Group’s topline and bottomline falling 17.6% yoy and 79.4% yoy respectively. The lacklustre Particleboard segment was mainly due to the soft market condition which was caused by US-China trade war, weakened USD/MYR and increase in raw material costs. Meanwhile, the languishing performance of RTA Furniture during the year was attributable to shortage of foreign workers in 1H18, failure to attain optimal capacity resulted in lower operational margin, unfavourable forex, as well as start-up costs for new factory.

• Proposed third interim dividend of 1.2 sen/share. Hevea has proposed a third interim dividend of 1.2sen/share for this financial year to reward its shareholders. This brings the total dividend declared for the year to 3.6 sen/share, translating into a decent dividend yield of 6%.

• Outlook for Particleboard segment remains challenging while expecting recovery under RTA Furniture. We envisage the Group to continue facing headwinds for its Particleboard segment in 2019 no thanks to excess capacities coming on stream coupled with prevailing US-China trade war which aggravates the current soft market condition. Thus, the Group will continue focusing on high value added products in order to avoid any price war with its competitors. For its RTA Furniture segment, we foresee that the Group could achieve better results with higher topline and better margin for 2019, as labour shortage issue is now fully resolved and it is now ramping up production to pursue operational efficiencies and regain market share.

Earnings Outlook/Revision

• We keep our 2019F core earnings estimate of RM18.1m. We also take this opportunity to introduce our 2020F core profit estimate of RM28.2m. Our 2019F and 2020F core net earnings estimates represent 29.3% and 56.2% yoy growth respectively.

Valuation/Recommendation

• Upgrade to BUY from HOLD on Hevea following recent selldown of the stock and re-emergence of its value, we believe. Furthermore, current share price is well supported by its attractive dividend yield of 6.0%. We change our valuation methodology from P/B to P/E as we reckon that the Group regains its earnings visibility. Our target price of RM0.68 (RM0.79 previously) is now pegged at 13.0x 2020F EPS.

Source: JF Apex Securities Research - 1 Mar 2019