HEVEA (5095) - Stronger earnings on stream for HeveaBoard

HeveaBoard Bhd
(July 4, RM1.49)
Initiate buy with a target price of RM2.19: HeveaBoard Bhd manufactures, trades and distributes a wide range of particle board and particle board-based products, particularly ready-to-assemble (RTA) furniture products. The switch in consumption trend for furniture products, coupled with the declining supply of tropical logwood, bodes well for processed wood products including particle board, medium-density fibreboard and RTA furniture, thanks to its competitive cost structure and pricing. HeveaBoard’s niche position will continue to benefit from the rising demand for premium particle board arising from increasing awareness of environmentally friendlier products.

HeveaPac Sdn Bhd is in the midst of setting up a new RTA manufacturing plant with additional capital expenditure (capex) of RM33.5 million. Scheduled for completion and commercial production by end-financial year ending Dec 31, 2017 (FY17), the new RTA plant will diversify HeveaPac’s RTA furniture product range to veneer-based furniture products, which are expected to command better profitability.

The company has all its costs denominated in ringgit while approximately 92% of the company’s revenue is denominated in US dollar, making the company a beneficiary of the strong US dollar. Our house view is for ringgit to remain weak against the greenback in the second half of FY17.

Strong balance sheet, bright earnings outlook and absence of lumpy capex going forward indicate generous dividend payout. In our forecasts, we project dividend per share of seven sen to 9.1 sen in FY17 to FY19 (assuming 40% payout), translating into decent dividend yield of 5.3% to 6.9% per annum in FY17 to FY19.

Risks include high dependency on foreign workers, escalating raw material prices and fluctuation in foreign currency. We project FY17 and FY18 net profit to increase by 16% and 39% to RM93.9 million and RM112.5 million respectively, largely to account for higher average selling price and profit margin assumptions. We like HeveaBoard due to its healthy and strong balance sheet (it turned net cash in FY15), high dividend payout (dividend policy of not less than 30%) and ongoing efforts in creating higher-margin products. — Hong Leong Investment Bank Research, July 4

HEVEA (5095) - Stronger earnings on stream for HeveaBoard