What’s New

• RTA Furniture comes to rescue. We met HeveaBoard (Hevea)’s Group Managing Director, Mr Yoong Hau Chun recently and came back feeling slightly positive on the Group’s prospects as we believe the worst is over for Hevea. To recap, Hevea was hit by double whammy last year whereby the Group’s Particleboard and RTA Furniture segments were adversely impacted by oversupply issue, trade war, weakening USD against MYR, rising raw materials prices coupled with shortage of foreign workers. However, going forward, the management guided that its RTA Furniture division shall perform better this year with the resolution of its foreign labour issue and anticipated greater demand from Japan driven by the 2020 Olympics. In contrast, the outlook on the Particleboard segment remains challenging, at least in in the immediate term, as bogged down by headwinds such as overcapacity in the industry (from Malaysia and Thailand) and prevailing USChina trade war (as China market flooded with particleboard resulting from tariff hike imposed by the US).

Comment

• Tough times ahead for Particleboard segment. As mentioned, performance of the Particleboard division is expected to remain lacklustre in 2019. It could even deteriorate further in its 1Q19 results, possibly in a loss as affected by slowdown in the China market (its main export destination with c.50% sales) pursuant to slowing economy, long CNY holidays coupled with the Group’s plant shutdown for annual maintenance works. The Particleboard segment is currently running at utilisation rate of 80% (from 90% in 2018) against 50% of some local players thanks to internal supply to its RTA Furniture division. The relatively high utilisation rate renders operational efficiency to the Group, hence giving advantage over its peers. Meanwhile, ASP is also under pressure during this year after dropping more than 30% last year. Notably, Hevea stopped its production of premium particleboard, NAF (no added formaldehyde adhesive system) as demand was weak with widening price gap between premium product and lower grade product. Currently, the higher grade specifications such as E0 and Super E0 constitute 75% of the Group’s particleboard sales. As such, we envisage Hevea to record segmental PBT margin of 5-6% for 2019, which is lower than 2018’s 7.0% along with declining sales.

• Count on RTA Furniture division. Management highlighted that there are 2000 workers currently under this business segment. Issue of shortage of foreign labour is considered resolved at this moment as current production is capable to accommodate demand. Should the 3rd production factory which was completed in 2017 come on stream, the Group would require additional 300-400 foreign workers (anticipating 20% increase in shipments to 720 containers per month from 600 containers per month currently). Having said that, we learnt that this production line (mainly catering veener-based products to the Japan market) has yet to be in full swing as its utilisation rate remains low. We believe the weak sales were due to previous labour shortage incident resulted in the Group’s failure to fulfil its orders and deliver on time. We reckon that Hevea needs time to regain customers’ trust and rebuild rapport with its clients. In a nutshell, we expect its segmental top line and bottom line to improve this year.
• Mushroom cultivation business expected to contribute positively this year. To recap, Hevea ventured into gourmet fungi business back in 2017 with operation commenced in 2018. The Group utilises its current by-product as substrate for mushroom cultivation. Trial run for the mushroom operation was successfully completed and commercialisation is underway with harvest period of 60 days with production capacity of 3000kgs or 3 tonnes/day. Currently, Hevea is supplying its king oyster mushrooms to food stores, local restaurants and an army camp which is nearby its factory. For initial start, the Group targets production of 1.5 tonnes/day or 45 tonnes/month and expects to rake in RM0.5m monthly sales (or RM6m yearly sales). This is in line with our expectation of RM5m yearly sales for 2019 with profit of RM1.0m assuming 20% margin (vs 2018 revenue of RM0.4m and Loss before tax of RM2m). Nevertheless, the segmental contribution to the Group’s earnings is still minimal as compared to its Particleboard and RTA Furniture segments.
• Commendable dividend yield. Hevea, thus far, has declared a total dividend declared of 3.6 sen/share for FY2018. We expect the Group to propose a final dividend of 1.2 sen/share next month. This translates into a decent dividend yield of 7.6% based on current share price.

Earnings Outlook/Revision

• No change to our core earnings estimates of RM18.1m (+29.3% yoy) for 2019F and RM28.2m (+56.2% yoy) for 2020F.

Valuation/Recommendation

• Maintain BUY on the stock with an unchanged target price of RM0.68, based on 13.0x 2020F EPS. Share price is well supported by its attractive dividend yield of over 7.0% for 2019/20F.

Source: JF Apex Securities Research - 22 Mar 2019