HeveaBoard
Bhd (5095) is a Company that manufactures and sells high grade particleboards
(PB) and ready-to-assemble (RTA) furniture. I understand that this stock has
been heavily covered and monitored by most investors and finance houses, but
I’d like to break it down to the lay investor.
Hevea has
a very small presence in Malaysia – 3% of annual turnover, and it largely sells
its furniture overseas, especially Japan (31%), China (22%), Australia (8%), and
Korea (5%). Approximately 78% of its turnover is from the Asia Pacific region
and approximately 5% from Europe. Focusing on Asia Pacific is the right
strategy as this region is experiencing sustained growth.
Check out
the article from Forest & Wood Products Australia regarding the potential
growth of PB and MDFs in the Asia Pacific region:
Below is
a summary of the article:
There will be sustained demand in PBs and
medium-density fiberboard (MDF) – particularly in Asia Pacific which is led by
China. China as part of its 5-year plan (2016 – 2020), placed a ban on native
forest harvesting nationwide.
The ban
by China on commercial logging in key forest areas is further corroborated by
the website below from the Ministry of Environmental Protection, The People’s
Republic of China. China is the world’s largest timber importer and second largest
consumer. The article mentions that “by 2020, China's timber needs will rise to
700 million cubic meters.” There is definitely some serious demand in China and
this is just backed-up by the growth Hevea is experiencing from China. Check
out the revenue growth from China in the past 7 years.
The
article by The PRC’s Ministry of Environmental Protection:
Chart 1:
Asia Pacific Sales by Destination
(Source: Annual Reports)
I’d say
not all is rosy for the PB and the MDF industry as there are headwinds specifically
in the supply of raw materials. This is evidenced by the recent flood in
Southern Thailand which significantly affected the supply of rubber wood. Note
that Hevea consumes rubber logs (as mentioned in The Edge’s article). As it is,
PB prices have been increasing due to supply constraints. Additionally, we have
been seeing an appreciation of the MYR against the USD (which is a bane for
exporters), and the shortage of labour which was mentioned by Hevea’s managing
director. Hence, in the current and near future, escalation of costs is
inevitable for PB manufacturers.
Also
manufacturers of MDF can easily switch to PB manufacturing, as seen by
Evergreen Fibreboard; likewise can be said for PB manufactures. This denotes
low barriers to entry in this industry. However, there are many grades of PBs,
and Hevea manufactures high grade low formaldehyde PBs. Based on my current
research there are a few listed low formaldehyde PB manufacturers like Hevea, such
as Meico, Subur Tiasa and Evergreen (future). All which are doing relatively
well in terms of sales and profitability.
Financial
Summary
For a
start, let’s see how well Hevea is performing financially.
Chart 2:
Breakdown of Income Statement based on Product Division
(Source: Annual Reports, Quarterly Reports and www.xe.com)
Q2 2017 represents cumulative (Q1 & Q2 2017)
Chart 2
is the detailed breakdown of revenue and profits between the 2 product
divisions of Hevea. Note that it’s not perfect as the figures do not exactly
tie-up. It can be seen that both divisions profited greatly from the
depreciation of the MYR against the USD.
Hevea has
been enjoying double-digit PBT margins since 2015 when the MYR significantly
depreciated against the USD. PBT margins for PB and RTA segments in 2016 were
20% (2015: 19%) and 15% (2015: 14%) respectively. For exporters like Hevea, a
weak ringgit is an advantage.
From what
I’ve analyzed, this company has quite a low effective tax rate. In 2016, the
effective tax rate was approximately 11% (2015: 11%). Quite low considering
corporate tax rates are 24% (2015: 25%). This was mainly due to the utilization
of deferred tax assets which were not recognized in the financial statements of
about RM11 million (2015: RM12.5 million). Hevea still has around RM34million of
deferred tax assets not recognized in the financial statements that can be set-off
against taxable profits.
Chart 3:
Bloomberg USD/MYR 5-year chart
The above
USD/MYR 5-year chart gives an idea of how significantly the MYR has depreciated.
However, the rate of change in the depreciation of the MYR may have slowed down
as evidenced by the MACD. Looking from the chart, there should be long-term
support for USD/MYR at 4.0000.
Chart 4:
Financial Health of Hevea
(Source: Annual Reports, Quarterly Reports)
Q2 2017 represents cumulative (Q1 & Q2 2017)
It can be
seen that Hevea is in a net cash position of approximately RM98 million based
on the latest financial statements. Net Assets per share was 80 cents while Net
Cash per share was 17 cents. The balance sheet is relatively healthy – net cash
position and current assets were approximately 4 times the value of current liabilities.
Chart 5: Hevea’s
Cash Flow
(Source: Annual Reports, Quarterly Reports)
Cash flow
is reasonably healthy. Capital investments in 2016 & 2017 have been more
significant than other years as they were for expanding production capacity and
upgrading product quality. Also, in 2017, the company embarked on a new
business venture to turn its by-products into raw materials for its mushroom business.
This division is only expected to bear fruit in 2018.
Return on
capital investment has been decent as this was evident by an increase in
revenue and improvement in profit margins in 2016 and 2015. In 2017, the
company has only spent half of its planned capital investment. The remaining
RM20million may be spent either in Q3 and Q4 2017.
Hevea has
a consistent trend of achieving higher sales and profits. Additionally, due to
the increased demand of PBs and furniture in China, there should be future growth
in Hevea’s revenue. Based on Chart 2, growth has been more evident in its RTA
segment than its PB segment. Management has been investing a large amount of
cash in its RTA segment; hence, I would foresee more growth in this division. I
would think that the process of producing PBs are simpler and this process can
be duplicated by most companies. However, producing RTAs and developing its own
brand may bring about sustained and better profits. I gather that the company
has its own children furniture line called KREA Kids, but I’m not too sure whether
this brand has taken off successfully. It has a Facebook account, website, and
a presence in Lazada, but it seems as if it has not garnered much attention.
But anyways, there is potential in this product, but it’s just a lack of
awareness in the local public of the dangers of being exposed to formaldehyde.
So if you
have the time, go check out these websites:
I’m doing them a favor.
The
Future for Hevea
This
company has been trading at a relatively higher PE compared to its furniture
peers. But, due to its strategy to focus on the demands of China, increased
investments in RTAs and PBs, a higher PE might be accorded to this company.
Q2 2017
results have been mediocre, it should be noted that the profitability of its
RTA segment was affected by cost pressures. Typically, Q2 and Q3 are not its
best quarters, Q1 and Q4 are its best performing quarters due to the seasonality
of its sales. In conclusion, investors have many options, either to wait for things
to normalize until Q4 2017 or Q1 2018, or opt to invest their money elsewhere. Either
way, it’s always good to keep a decent company like Hevea on the investment
radar.
Note: This is not a recommendation to buy or sell this
stock by the writer. The writer owns shares in this company. The writer intends
to share his view point on this stock’s potential investment value, any
decision to invest or sell shares in this company is entirely at the reader’s
own risk.
http://mrinvestor12.blogspot.my/2017/09/are-furniture-stocks-still-in-vogue-so_61.html
