HeveaBoard expects RTA furniture unit to perform better

TheEdge Mon, Mar 25, 2019 10:35am - 5 years View Original


HeveaBoard Bhd
(March 22, 64 sen)
Maintain buy with a target price of 68 sen:
HeveaBoard Bhd last year saw its particle board and ready-to-assemble (RTA) furniture segments adversely impacted by an oversupply issue, a trade war, a weakening US dollar against ringgit, rising prices of raw materials coupled with a shortage of foreign workers. However, management guided its RTA furniture division shall perform better this year with the resolution of its foreign labour issue and an anticipated greater demand from Japan driven by the 2020 Olympics.

In contrast, the outlook for the particle board segment remains challenging, at least in the immediate term, bogged down by headwinds such as an overcapacity in the industry — from Malaysia and Thailand, and the prevailing US-China trade war, as China’s market is flooded with particle boards resulting from a tariff hike imposed by the US.

As mentioned earlier, the particle board division’s performance is expected to remain lacklustre in 2019. It could even deteriorate further in its first quarter of financial year 2019 (1QFY19) results, possibly in a loss as affected by a slowdown in China’s market — its main export destination with about 50% sales — also pursuant to the long Chinese New Year holiday coupled with the group’s plant shutdown for annual maintenance works. The particle board segment is currently seeing a utilisation rate of 80%, from 90% in 2018, against 50% of some local players, thanks to internal supply to its RTA furniture division. The relatively high utilisation rate renders operational efficiency to the group, hence giving an advantage over its peers.

Meanwhile, the average selling price is also under pressure this year after dropping more than 30% last year. Notably, HeveaBoard has stopped producing premium particle boards and the no added formaldehyde adhesive system due to weak demand with a widening price gap between its premium and lower-grade products. Currently, the higher grade specifications such as E0 and Super E0 constitute 75% of the group’s particle board sales. As such, we envisaged HeveaBoard to see a segmental profit before tax margin of 5% to 6% for 2019, lower than 2018’s 7% along with declining sales.

Management has highlighted the current 2,000 workers under this business segment. The foreign labour shortage issue is considered resolved for now as the current production is capable to accommodate demand. If the third production factory, completed in 2017, were to come on stream, the group would require 300 to 400 additional foreign workers — this is anticipating a 20% increase in shipments to 720 containers from 600 containers per month currently.

We have also learnt that this production line, mainly catering for veener-based products to the Japan market, had yet to run full swing as its utilisation rate remains low. We believe the weak sales were due to a previous labour shortage incident resulted in the group’s failure to fulfil its orders and deliver in good time. We reckoned HeveaBoard needs some time to regain its customers’ trust and rebuild a rapport with its clients. In short, we expect its segmental top and bottom lines to improve this year.

HeveaBoard ventured into the gourmet fungi business in 2017 with operations commencing in 2018. The group uses its current by-product as a substrate for mushroom cultivation. The trial run for the mushroom operations was successfully completed and the commercialisation is underway with a 60-day harvest period and a production capacity of 3,000kg or three tonnes a day. Currently, HeveaBoard is supplying its king oyster mushrooms to food stores, local restaurants and an army camp near its factory.

For the initial period, the group targets a production of 1.5 tonnes a day or 45 tonnes a month, expecting to rake in RM500,000 monthly in sales or RM6 million in yearly sales. This is in line with our expectations of RM5 million in yearly sales for 2019 with a profit of RM1 million, assuming a 20% margin versus 2018’s revenue of RM400,000 and a loss before tax of RM2 million. Nevertheless, the segmental contribution to the group’s earnings is still minimal compared with its particle board and RTA furniture segments.

HeveaBoard thus far has declared a total dividend of 3.6 sen per share for FY18. We expect the group to propose a final dividend of 1.2 sen per share next month. This translates into a decent dividend yield of 7.6% based on the current share price. — JF Apex Securities Research, March 22

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