Result

• Earnings exceeding expectation. HeveaBoard Berhad (Hevea) recorded 4Q19 core net profit of RM7.3m, which soared 13.3% yoy and 124.8% qoq. Overall, the Group chalked up RM13.6m of core earnings in its 2019 results (marginally down by 2.5%) which is 12% above our full year earnings estimates. This is mainly due to lower-thanexpected effective tax rate and better margin achieved under its RTA Furniture segment.

Comment

• Continued recovery in RTA Furniture underpinned 4Q19 results. Hevea achieved better yoy and qoq performances thanks to continuous recovery in RTA Furniture segment as segmental PBT surged strongly (+331.3% yoy, +176.0% qoq). The better showing of RTA Furniture was mainly driven by improved production efficiencies, better cost management resulted in lower operational costs coupled with favourable USD/MYR exchange which lifted the profit margin (segmental PBT margin: +7.1 ppt yoy, +4.7 ppt qoq) amid lower contribution from the Particleboard Segment (PBT: -60.7% yoy, -52.2% qoq).

• Lower full year results. For 2019, Hevea posted a weaker result with the Group’s reported revenue and net profit falling 6.7% yoy and 16.2% yoy respectively. This was mainly dragged down by the Particleboard segment (segmental revenue and PBT tumbled 19.8% and 75.9% respectively) as affected by the soft market sentiment arising from the trade war between the US and China, and also higher inter-company sales to the RTA segment which was eliminated on consolidation. The lower average selling price as a result of overcapacity also weighed on the division’s bottom line (segmental PBT margin: -4.9 ppt yoy). Furthermore, the absence of tax credit during this financial year as compared to the previous year further dragged down 2019 net earnings.

• Proposed third interim dividend of 1.0 sen/share. Hevea has proposed a third interim dividend of 1.0 sen/share for this financial year (vs 1.2 sen/share a year ago). The Group, thus far, has declared 3.0 sen dividend for FY2019, which translates into a dividend yield of 7.1% based on current share price.

• Not fully out of the woods yet. Although we expect Hevea to achieve better 2020F results underpinned by its RTA Furniture division (as we witness the margin recovery in RTA Furniture for the past few quarters), we have yet to see the meaningful rebound in the topline, especiallydemand from its major market, Japan. Furthermore, the outlook on the Particleboard segment remains murky, at least in in the immediate term, as bogged down by headwinds such as overcapacity in the industry (supplies from Malaysia and Thailand), prevailing US-China trade war (as China market flooded with particleboard resulting from tariff hike imposed by the US) and further exacerbated by the coronavirus pandemic.

Earnings Outlook/Revision

• We slash our 2020F core earnings estimates by 9.1% to RM17.0m (+24.7% yoy) after revising downwards of our margin for the Particleboard segment and its Fungi Cultivation division. We also take this opportunity to introduce our 2021F core earnings of RM20.6m (+21.5% yoy).

Valuation/Recommendation

• Maintain HOLD on Hevea with a lower target price of RM0.42 (from RM0.56) following our earnings downgrade. Our revised target price is pegged at P/E of 14.0x 2020F EPS. We reckon that current share price is well supported by its decent dividend yield of 7.6% for 2020F (assuming DPS of 3.20 sen).

Source: JF Apex Securities Research - 27 Feb 2020