Result

• Earnings below expectation. HeveaBoard Berhad (Hevea) recorded 3Q19 core net profit of RM3.2m (after excluding realised and unrealised forex gain during the quarter), which soared 37.4% yoy and tripled qoq. Overall, the Group chalked up RM6.3m of core earnings in its 9M2019 results (-16.0% yoy) which are below our expectation, accounting for 46% of full year core profit estimate mainly due to weaker-than-expected margins despite revenue accounts for 70% of our forecast.

Comment

• Recovery in RTA Furniture underpinned 3Q19 results. The Group recorded better yoy and qoq performances thanks to recovery in RTA Furniture segment as segmental PBT surged strongly to RM2.5m in this quarter from RM0.3m a year ago and successfully turnaround from loss before tax (LBT) of RM0.6m in the previous quarter. The better showing of RTA Furniture was mainly driven by higher production efficiencies, better cost management resulted in lower operational costs coupled with favourable USD/MYR exchange which lifted the profit margin. Moreover, the Group’s Particleboard segment managed to sustain its profitability during this quarter also contributing to the overall earnings (segmental PBT: -36.1% yoy and +9.5% qoq).

• Weaker 9M19. For 9M2019, Hevea posted a lackluster result with the Group’s topline and bottomline falling 8.0% yoy and 16.0% yoy respectively. The uninspiring performance was mainly dragged down by the Particleboard segment (segmental revenue and PBT tumbled 24.1% and 80.0% respectively) 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 second interim dividend of 1.0 sen/share. Hevea has proposed a second interim dividend of 1.0 sen/share for this financial year (vs 1.2 sen/share a year ago).

• Uncertainties remain for both RTA Furniture and Particleboard segments. Although we witness the margin recovery in RTA Furniture during this quarter, we have yet to see the meaningful increase in the topline, especially demand from Japan with upcoming 2020 Olympics. Furthermore, 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 10.5% and 13.4% to RM12.2m and RM18.7m after lowering our sales volume and ASP assumptions for both business segments as well as their profit margins.

Valuation/Recommendation

• Maintain HOLD on Hevea with an unchanged target price of RM0.56. Our target price is now pegged at P/E of 16.0x 2021F EPS. We reckon that current share price is well supported by its decent dividend yield of 5.9% for 2019F (assuming DPS of 3.20 sen).

Source: JF Apex Securities Research - 22 Nov 2019