· Pioneer in biomass manufacturing industry. Heng Huat (“HH”) is an integrated manufacturer of coconut and oil palm biomass & value added products since 2007 and currently commands the lion's market share (c.47%) in the biomass materials industry. Segmental-wise, the biggest earnings' contributor is Palm Fibre segment (62% of the group’s gross profit in FY13), followed by the Mattress & Related product (20%), Coconut Fibre (16%) and Briquette (2%).

· Earnings remain upbeat post the listing. Group net profit improved 11% YoY to RM8.2m in 9M14, on the back of 35% YoY increase in revenue and 22% hike in PBT. The higher turnover was mainly driven by higher demand of oil palm empty fruit bunch fibre, particularly from China and improved average selling prices by c.21% vs. a year ago. Its PBT growth, meanwhile, was at a slower pace as compared to its turnover due mainly to: (i) non-recurring listing expenses of RM1.87m, (ii) lower margin recorded in its biomass materials and related products segment, and (iii) increase in transportation costs.

· Prospect remains buoyant. Management believes its growth momentum remains buoyant moving forward underpinned by: (i) higher demand of biomass materials as a result of population growth, increasing applications for natural fibre, and rising demand from China, and (ii) the recent banning of new coal-fired plants in Beijing, Shanghai, and Guangzhou, which is likely to spur demand for cleaner, alternative source of energy, like briquette.

· Palm Fibre Mat demand continues to escalate. HH’s Palm Fibre Mat has received overwhelming response and record c.100% take-up rate since launched. The group has merely been operating one production line thus far with a production capacity of 100 pieces per month. Moving forward, management intends to ride with the current strong demand wave and setting-up another production line in 1Q15. Note that, Palm Fibre Mat is a 100% organic fibre from a renewable source – Empty Fruit Bunch (EFB). It has the right strength and durability to protect slopes from erosion, while allowing vegetation to flourish and absorb excess solar radiation. Mulching and erosion control are the two main functions of Palm Fibre Mat and thus captured the plantation and construction players’ attention since the product was launched. HH highlighted that plantation players could enjoy a production cost saving of more than 2x by using the Palm Fibre Mat (at RM3.50/piece). EBITmargin- wise, the group is targeting to achieve c.30% on the back of higher economic of scale.

· Targeting to transfer to Main Board in the 2H15 despite being just a six-month old newbie in the Ace Market. The rapid route of transfer of listing is not a surprise given that HH was not far off from the Main Board’s listing requirements when they went for listing in the Ace Market last year. In view of the current profitability trend, management is confident of posting profitability in FY14, which is one of the transfer’s requirements.

· No formal divided policy but management intends to distribute 20% of its annual net profit as dividend to reward its shareholders. Based on our targeted FY14E net profit of RM10.2m, we expect the group to declare 1.0 sen as dividend, translating into 2.5% dividend yield.

· Trading Buy at RM0.51/share. HH is currently trading at an undemanding FY15E PER of 6.4x (vs. the FBMSmall Cap fwd PER of 9.2x). Assuming a 10% discount (as a result of its smaller market cap) to the benchmark small cap index fwd PER, we derived a fair value for HH at RM0.51, based on targeted FY15E PER of 8.2x.

Source: Kenanga