Highlights

• We walked away from our small group meeting with HeveaBoard’s management feeling encouraged about the group’s near-term prospects.

• Room for price adjustment… HeveaBoard currently exports circa 50% of its particleboard output to China. Management highlighted that there is room to raise its ASPs for particleboards to China, given the recent strengthening of yuan against US$. Besides, HeveaBoard is constantly working towards producing higher profit margin particleboard; it is one of the first two players in the market to introduce Non-Added Formaldehyde (NAF) Board, which will enable it to generate attractive profitability.

• Better margin for RTA furniture… The new ready-to assemble (RTA) furniture plant has completed and started its trial production last week with earnings delivery expected by early FY18. This plant focuses mainly on veneer-based RTA furniture which is able to generate higher profit margin.

• Tokyo 2020 acts as another catalyst… We believe there will be an increase in RTA sales by end-FY18 riding on preparation for Tokyo 2020 Olympics. Historically, sales volume growth tends to be higher 1-2 years before global sports events i.e. in FY14 for Rio 2016.

• Cultivation of King Oyster Mushroom s by Jan-18… Heveagro will be able to harvest 3 tonnes of mushrooms per day. The company is looking to sell these mushrooms at around RM10/kg, a competitive price compared to the current market price of circa RM20/kg.
   
• Labour and rubber logwood issue still linger… Post expansion, the group will need an additional 500 workers i n order to achieve optimal production level. While the supply of rubber logwood had recovered in Jun-17, price has remained sticky on the high side at RM160/tonne. Nonetheless, the company has been constantly looking for opportunity to move up its value chain and enhance automation processes.
• Our sensitivity analysis indicates that every 10 sen appreciation in ringgit against the US$ will decrease Hevea’s profit by 11% assuming a constant ASP.

Risks

• 1) Highly dependency on foreign workers, 2) Escalating raw material price and 3) Fluctuation on foreign currency (US$).

Forecasts

• Maintained.

Rating

BUY ( ↔ )

• We continue to like HeveaBoard for its healthy and strong balance sheet (net cash/share of 10.32 sen as at 31 Mar 2017), generous dividend payout (dividend payout ratio of 45% in FY16), and its ongoing effort in creating higher margin products.

Valuation

• Maintain BUY recommendation, with unchanged TP of RM2.19 based on 11x FY18 fully-diluted EPS of 19.8 sen.

Source: Hong Leong Investment Bank Research - 14 Sept 2017