HeveaBoard Bhd
(March 1, 61.5 sen)
Maintain buy with a target price of 68 sen: HeveaBoard Bhd recorded a fourth quarter 2018’s (4QFY18) core net profit of RM6.4 million (after excluding realised and unrealised foreign exchange (forex) gain of RM0.6 million during the quarter), which tumbled 63.6% year-on-year (y-o-y) but soared 172.6% quarter-on-quarter (q-o-q).

 
Overall, the group chalked up RM14 million of core earnings in its 2018 results (-79.4% y-o-y), exceeding our full-year core profit estimate of RM11 million.

The surprisingly strong 4QFY18 results were mainly due to better-than-expected revenue as well as gross profit margin.

The group recorded lower y-o-y results which were mainly dragged down by the poor performance in the particle board segment (segmental revenue: -20.1%, profit before tax (PBT) margin: -7.6 percentage points) as affected by overcapacity issue, prevailing US-China trade war coupled with rising raw material costs.

Moreover, the write-down of slow-moving inventory at the ready-to-assemble (RTA) furniture segment also weighed on the group’s bottom line.

HeveaBoard achieved better 4QFY18 as compared to the previous quarter mainly due to commendable performance shown by the RTA furniture segment (segmental revenue: +44.7%, PBT: +433.3%).

In addition, earnings in this quarter were further lifted by favourable tax credits, that is unabsorbed capital allowances, investment tax allowance, reinvestment allowance and unutilised tax losses available to offset against the taxable statutory income.

For the full year of 2018, HeveaBoard posted a dismal result with the group’s top line and bottom line falling 17.6% y-o-y and 79.4% y-o-y respectively. The lacklustre particle board segment was mainly due to the soft market condition which was caused by US-China trade war, weakened US dollar/ringgit and the increase in raw material costs.

Meanwhile, the languishing performance of RTA furniture during the year was attributable to a shortage of foreign workers in 1H18, failure to attain optimal capacity resulted in the lower operating margin, unfavourable forex, as well as start-up costs for a new factory.

HeveaBoard has proposed a third interim dividend of 1.2 sen per share for this financial year to reward its shareholders. This brings the total dividend declared for the year to 3.6 sen per share, translating into a decent dividend yield of 6%.

We envisage the group to continue facing headwinds for its particle board segment in 2019 no thanks to excess capacities coming on-stream, coupled with prevailing US-China trade war which aggravates the current soft market condition.

Thus, the group will continue focusing on high value-added products in order to avoid any price war with its competitors. For its RTA furniture segment, we foresee that the group could achieve better results with higher top line and better margin for 2019, as labour shortage issue is now fully resolved and it is now ramping up production to pursue operational efficiencies and regain market share.

We keep our 2019F (forecast) core earnings estimate of RM18.1 million. We also take this opportunity to introduce our 2020F core profit estimate of RM28.2 million. Our 2019F and 2020F core net earnings estimates represent 29.3% and 56.2% y-o-y growth respectively.

We upgrade to “buy” from “hold” on HeveaBoard following recent selldown of the stock and re-emergence of its value, we believe.

Furthermore, the current share price is well supported by its attractive dividend yield of 6%.

We change our valuation methodology from price-to-book ratio to price-to-earnings as we reckon that the group regains its earnings visibility. Our target price of 68 sen (79 sen previously) is now pegged at 13 times 2020F EPS. — JF Apex Securities Bhd, March 1