Highlights
- Rubberwood export ban. The government announced that it will ban the exports of rubberwood effective 1 Jul 2017, to address the shortage of raw materials faced by Malaysia’s furniture industry.
- Malaysia’s rubberwood exports have grown by a CAGR of 13.9% from 2010-2016 (Figure 1). Apart from rising rubberwood exports, we note that the rise in rubberwood prices YTD was also driven by less-than-favourable weather condition, which has resulted in rubberwood shortage and higher rubberwood prices YTD. This has, in turn, resulted in higher production cost among the wood-manufacturing players in Malaysia.
- All-in-all, we opine that the latest development is positive to wood-based manufacturers in Malaysia, as the ban on rubberwood will alleviate supply shortage of rubberwood in the country, hence easing the raw material cost pressure.
- Outlook remains bright in 2H17. We believe earnings prospects of the wood-based manufacturing players remain bright in 2H17, underpinned mainly by continued weakness in MYR (as bulk of the players’ earnings are denominated in US$) and lower raw material cost (as the supply of rubberwood will now increase domestically).
- Evergreen: We continue to remain positive on Evergreen mainly on the back of its turnaround plan and the commissioning of the second RTA line. The sustained US$ strength (ringgit weakness) will directly contribute to the topline positively.
- Homeritz: We continue to remain positive on Homeritz as the company is still on expansion mode. We believe that sustained US$ strength (ringgit weakness) will provide a favourable environment for Homeritz to mitigate rising cost of doing business.
Catalysts
- Strengthening of the greenback (further tightening by the US Fed).
- Firmer global economic growth.
Risks
- 1) Sharper-than-expected ringgit appreciation, 2) Escalating raw materials and labour cost, 3) Weaker than expected export demand, and 4) Trade protectionism.
Rating
OVERWEIGHT ↔- We have an OVERWEIGHT rating on the sector, having a view on subsiding raw material cost. We believe that strong USD trend will provide a favourable environment for the wood product exporters to mitigate rising cost of doing business.
Top Picks
- We maintain our BUY recommendation on Evergreen with a TP of RM1.05 (based on 11x FY17 core EPS 9.6 sen).
- Reiterate our BUY recommendation on Homeritz with a TP of RM1.18 (based on 11x CY18 core EPS 10.7 sen).
Source: Hong Leong Investment Bank Research - 30 Jun 2017
http://klse.i3investor.com/blogs/hleresearch/126460.jsp
