Result

• Earnings below expectation. HeveaBoard Berhad (Hevea) recorded 2Q19 core net profit of RM1.0m (after excluding realised and unrealised forex gain during the quarter), which slumped 70.4% yoy and 52.0% qoq. Overall, the Group chalked up RM3.1m of core earnings in its 1H2019 results (-40.4% yoy) which are below our expectation, accounting for merely 17% of full year core profit estimate. The weaker-than-expected 2Q19 results were dragged down by surprised loss in the RTA Furniture segment which we expect to perform strongly this year.

Comment

• Dismal 2Q19. The Group recorded weaker yoy and qoq performances no thanks to poor showing by the RTA Furniture segment (segmental revenue: -9.7% yoy, -29.1% qoq; LBT of RM0.6m vs PBT of RM1.8m a year ago and RM6.5m in the immediate preceding quarter). However, the Group managed to clinch a better result for its Particleboard segment (returned to the black with segmental PBT of RM2.1m during this quarter against LBT of RM2.3m in the immediate preceding quarter on the back of rising segmental revenue, +41.0% qoq). We believe the lacklustre performance of the RTA Furniture segment was due to low season in Japan which resulted in low utilisation of production capacity.

• Disappointing 1H19. Likewise, for 1H2019, Hevea posted a sluggish result with the Group’s topline and bottomline falling 9.7% yoy and 40.4% yoy respectively. The depressing performance was mainly due to the Particleboard segment (LBT of RM0.2m as segmental revenue tumbled 27.9% yoy) pursuant to the major shutdown for preventive maintenance of over 3 weeks during 1Q19 which resulted in lower production coupled with lower sales volume and average selling price as a result of soft market sentiments stemming from the prevailing US-China trade war.

• Proposed first interim dividend of 1.0 sen/share. Hevea has proposed a first interim dividend of 1.0 sen/share for this financial year (vs 1.2 sen/share a year ago).

• Outlook remains challenging. While we envisage the RTA Furniture division to perform better this year with the resolution of its foreign labour issue and anticipated greater demand from Japan driven by the 2020 Olympics, the sudden loss in this quarter has dampened our optimism in this business segment to lift the Group’s overall growth prospects. Moreover, the outlook on the Particleboard segment remains subdued, at least in in the immediate term, as bogged down by headwinds such as overcapacity in the industry (supplies from Malaysia and Thailand) and prevailing US-China trade war (as China market flooded with particleboard resulting from tariff hike imposed by the US).

Earnings Outlook/Revision

• We slash our 2019F and 2020F core earnings estimates by respective 24.8% and 23.4% to RM13.6m and RM21.6m after lowering our sales volume and ASP assumptions for both business segments as well as their profit margins. Also, we increase our effective tax rate to better reflect its lower investment tax allowance, reinvestment allowance and unutilised tax losses available to offset against statutory business income.

Valuation/Recommendation

• Downgrade to HOLD from BUY on Hevea with a lower target price of RM0.56 (RM0.68 previously) following our earnings cut. Our revised target price is pegged at 14.0x 2020F EPS. We reckon that current share price is well supported by its decent dividend yield of 7.1% for 2019F (assuming DPS of 4.0).

Source: JF Apex Securities Research - 23 Aug 2019