HeveaBoard (BUY; NEW) INITIATION INDUSTRY: OVERWEIGHT Stronger earnings on stream Highlights HeveaBoard Bhd manufactures, trades and distributes a wide range of particleboard and particleboard-based products (in particularly, RTA furniture products). The switch in consumption trend for furniture products, coupled with the declining supply of tropical log wood bode well for processed wood products including particleboard, MDF, and RTA furniture, thanks to its competitive cost structure and pricing. HeveaBoard s niche position as a premium particleboard will continue to benefit from the rising demand for premium particleboard arising from increasing awareness on environmentally friendlier products. HeveaPac is in the midst of setting up a new RTA manufacturing plant with additional capex of RM33.5m. Scheduled for completion and commercial production by end-fy17, the new RTA plant will diversify HeveaPac s RTA furniture product range to veneer-based furniture products, which is expected to command better profitability. The company has all its costs denominated in MYR while approximately 92% of the company s revenue is US$ denominated, making the company a beneficiary of the strong US$. Our house view is for ringgit to remain weak against US$ in 2H17. Strong balance sheet, bright earnings outlook, and absence of lumpy capex going forward indicate generous dividend payout. In our forecasts, we project DPS of 7.0-9.1 sen in FY17-19 (assuming 40% payout), translating to decent dividend yield of 5.3-6.9% p.a. in FY17-19. There is potential upside from new business venture, i.e. cultivation, packing, distribution and trading of gourmet fungi and agro products by utilizing current by-products as substrate. Risks 1) Highly dependency on foreign workers, 2) Escalating raw material price and 3) Fluctuation on foreign currency (US$). Forecasts Rating We project FY17-18 net profit to increase by 16%-39% to RM93.9m and RM112.5m respectively, largely to account for higher ASP and profit margin assumptions. BUY (New) We like HeveaBoard due to its healthy and strong balance sheet (turned net cash in FY 15), high dividend payout (dividend policy of not less than 30%), and it s ongoing effort in creating higher margin products. HLIB Research PP 9484/12/2012 (031413) July 4, 2017 Price Target: RM2.19 Share price: RM1.43 Sia Ket Ee kesia@hlib.hongleong.com.my (603) 2168 1071 KLCI 1,768.7 Expected share price return 53.1% Expected dividend return 4.5% Expected total return 57.6% Share price 1.6 1.4 1.2 1.0 (RM) HAVE (LHS) KLCI (RHS) 0.8 Jul-16 Sep-16 Dec-16 Mar-17 Jun-17 Pts 1740 1700 1660 1620 1580 Information Bloomberg Ticker HAVE MK Bursa Code 5095 Issued Shares (m) 539 Market cap (RMm) 771 3-mth avg daily volume ( 000) 2,131 SC Shariah-compliant YES Price Performance 1M 3M 12M Absolute 4.4 2.9 20.2 Relative 4.9 1.6 12.4 Major shareholders HeveaWood Industries Sdn 21.7% Firama Holdings Sdn Bhd 3.7% Tenson Hold Sdn Bhd 2.8% Summary Earnings Table FY Dec (RMm) 2016A 2017E 2018F 2019F Revenue 540.0 584.9 642.0 672.8 EBITDA 115.8 135.0 156.9 167.8 PBT 90.3 106.7 127.9 138.0 Net profit 80.7 93.9 112.5 121.5 Core net profit 78.9 93.9 112.5 121.5 Core EPS (sen) 15.7 17.5 21.0 22.7 P/E (x) 9.1 8.2 6.8 6.3 BVPS (RM) 0.8 1.0 1.2 1.4 GDPS(sen) 7.1 7.0 8.4 9.1 DY(%) 5.4 5.3 6.4 6.9 P/B (x) 1.7 1.5 1.2 1.0 ROA (%) 15.3 15.1 15.2 14.1 ROE (%) 18.7 18.2 17.9 16.2 HLIB Valuation We initiate coverage on HeveaBoard with a BUY recommendation, with TP of RM2.19 based on 11x FY18 fully-diluted EPS of 19.8 sen. Page 1 of 10 4 July 2017
Company background Figure 1: Company Structure Company Incorporated in 1993 and subsequently listed on the Main Board of Bursa Malaysia in Jan-2005, HeveaBoard Bhd manufactures, trades and distributes a wide range of particleboard and particleboard-based products (in particularly, ready-to-assemble furniture products). Figure 2: Sales and PBT margin breakdown Companies; HLIB Particleboard Particleboard, also known as chipboard, is an engineered wood product manufactured from rubber wood residues, which is pressed together using UF or EMDI based heat activated resin. Resin is a hydrocarbon secretion that comes from many different types of plants; it is a sticky substance. The level of formaldehyde in the adhesive and the physical properties will determine the quality level of the particleboard. Page 2 of 10 4 July 2017
There are four formaldehyde emission levels, namely Super E0, E0, E1 and E2. This classification is based on the measurement of formaldehyde emission levels. High emission of formaldehyde would cause respiratory irritation. Hence, HeveaBoard has ceased E2 production since mid-2014 and shifted its focus to E0 and super E0, which provide a higher margin. HeveaBoard pioneered the commercial production of Super E0 in South East Asia, which conforms to the Japanese Industrial Standard (JIS). It obtained JIS Mark Certification for its Super E0 and E0 boards in 2004. The company has two particleboard manufacturing lines located in Gemas, Negeri Sembilan, with total annual production capacity of 405,000 cm 3. Line one being the old line is solely for packing boards; the second line is operating at optimum capacity. HeveaBoard s products have been directly and indirectly exported to various countries mainly to the Asia Pacific region. Figure 3: Particleboard Company Ready-to-Assemble (RTA) Furniture HeveaPac is the largest laminated particleboard shelving RTA furniture producer in Asia. The factory is located in Seremban, Negeri Sembilan. It has a maximum annual production capacity of 7,200 containers; hires 2,000 workers and runs 24 hours. Particleboard is one of HeveaPac s major raw materials, sourced in-house from HeveaBoard and from third parties. It complements the particleboard manufacturing business, due to 1) consistent supply and quality of particleboard (the major raw material); and 2) price is stable and most competitive. As at FY16, the group s RTA business accounts for majority of sales (58%), followed by its particleboard business (42%). In terms of margins, RTA accounts a margin of 15% and particleboard of 20%. Investment Thesis Our investment thesis for HeveaBoard include: 1. The bright demand outlook for particleboard and RTA furniture; 2. HeveaBoard s niche position as premium particleboard (i.e. grade E0 and above) producer allows it to capture the rising demand for premium particleboard products; 3. Beneficiary of a strong US$ (against the MYR); and 4. Strong balance sheet. Riding on growing particleboard consumption According to CSIL (an independent research and consulting company), world furniture production expanded by 4% CAGR from US$340bn in 2010 to US$415bn in 2014, before declining to slightly above US$400bn in 2015, possibly due to increased competition and pricing pressure. Moving forward, CSIL projects that world furniture production will grow in the next few years (but at a slower rate vis-à-vis 2010-2014), underpinned by demand from China, US and India. Page 3 of 10 4 July 2017
Besides, CSIL pointed that several trends for world furniture market will likely remain and these include: 1) a general return to wood in its raw-looking form; and 2) mass market furniture projects at cheap prices. Figure 4: International Furniture Trade (US$bn) CSIL In our view, the switch in consumption trend for furniture products, coupled with the declining supply of tropical log wood (arising from government s policy on the implementation of sustainable forest management, see Figure 5) bode well for demand for processed wood products including particleboard and medium density fibreboard (MDF), as well as RTA furniture, thanks to the competitive cost structure and selling prices. Rubberwood will be more competitively available Bright demand prospects aside, the Government has recently banned exports of rubberwood in attempt to ease shortage of rubberwood, which has in turn resulted in higher raw material costs among furniture and engineered wood producers in Malaysia. We note that such move is positive for furniture and engineered wood producers including HeveaBoard, as it alleviates raw material shortage and rising raw material cost pressure. Figure 5: Malaysia: Export value of timber from Jan to Oct (RM m) Malaysia Official Data Page 4 of 10 4 July 2017
HeveaBoard s niche position as premium particleboard producer allows it to capture the rising demand for premium particleboard products Over the years, HeveaBoard has been consistently moving up its value chain to concentrate only on the premium, low emission range of particleboard products, whereby the environmental friendliness, quality requirements, selling prices, and profitability are much higher. We note the management s continuous efforts in raising the quality of particleboard products are evidenced in HeveaBoard s particleboard segment over the past few years (see Figure 6). HeveaBoard s niche position as a premium particleboard will continue to benefit from the rising demand for premium particleboard arising from increasing awareness on environmentally friendlier products. Figure 6: HeveaBoard s Historical PBT Margin for Particleboard Segment Bursa Malaysia; HLIB In response to the increasing demand for RTA furniture, HeveaPac is in the midst of setting up a new RTA manufacturing plant with additional capex of RM33.5m (including the acquisition of land in Seremban for RM13.5m). Scheduled for completion and commercial production by end of FY17, the new RTA plant will diversify HeveaPac s RTA furniture product range to veneer-based furniture products. The products are catered for higher-end customers hence commanding better profitability. The company has all its cost denominated in MYR while approximately 92% of the company s revenue is US$ denominated, making the company a beneficiary of the strong US$. Our house forecast is for MYR to remain weak at RM4.30-4.40/US$ in 2H 2017. Our sensitivity analysis indicates that every 10 sen depreciation in MYR against the US$ will boost Hevea s FY17-18 bottomline by 11%. Figure 7: US$:MYR Trend RM/US$ 4.60 4.50 4.40 4.30 4.20 4.10 4.00 3.90 3.80 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Companies; HLIB Page 5 of 10 4 July 2017
Strong balance sheet HeveaBoard has turned into a net cash of RM64.1m (or net cash per share of 15 sen) since end-fy15 and increased further to RM114.9m (or net cash per share of 23 sen) in end-fy16. Moving forward, we expect HeveaBoard s financial position to remain solid, given its bright earnings outlook (which will in turn translate to strong operating cash flow generation) and the absence of lumpy capex (with budgeted capex of RM30m and RM20m for FY17 and FY18 respectively). Figure 8: HeveaBoard s Historical Net Debt/Cash Trend Companies; HLIB Icing on the cake cultivation of gourmet fungi Core businesses aside, we note that HeveaBoard has recently ventured into new business, which is involved in the cultivation packing, distribution and trading of gourmet fungi and agro products by utilizing HeveaBoard s current by-products as substrate. HeveaBoard has so far invested RM12m in this business venture (mainly spent on factory and equipment). Management guided that the first batch of these mushroom will be out in the market by 1Q18. While management appears to be confident that the new business will start contributing to HeveaBoard s top and bottom lines starting from 1Q18 with a higher PBT margin as compared to current products sold, we have yet to incorporate potential earnings contribution from this new business venture into our earnings forecasts as we opt to remain conservative. Financials Earnings review and forecast The Group s revenue and core net profit grew by CAGR of 6.4% and 69.4% respectively from FY11 to FY16, due to capacity and margin expansion at both the particleboard and RTA segments, declining interest expense (arising from declining net debt). We project HeveaBoard s core net profit to expand by 8%-20% to RM93.9m, RM 112.5m and RM121.5m (FY17-19) respectively, underpinned by: 1) A higher MYR/US$ assumption (RM4.30/US$ vs. average of RM4.00/US$ in FY16), 2) stable margin (at both the particleboard and RTA segments, as we believe management continuous efforts to improve its product quality will mitigate current rising cost of raw materials (in particularly, rubber log wood and adhesives). Page 6 of 10 4 July 2017
Figure 9: Revenue and Profit trend Companies; HLIB Figure 10: Dividend trend Companies; HLIB High and sustainable dividend payout Its recent dividend policy of not less than 30% payout coupled with strong cashflow, low CAPEX and high single digit earnings growth suggest that dividend will be on a rising trend, representing a potential re-rating catalyst for the company. We project HeveaBoard s DPS to increase by 18.3-30% to 7.0 sen, 8.4 sen, and 9.1 sen respectively, translating to dividend yield of 5.3-6.9%. Risk Foreign labour force The nature of the business is highly dependent on labour at the RTA segment. Any interruption as a result of change in government policies on foreign workers could be operationally disruptive. However, the management has been and will continue to venture into automation to reduce its reliance on labour. The company is currently employing 2,000 foreign workers. Fluctuations of foreign currencies (in particularly the US$) Over 90% of Hevea s revenue is derived from US$ exports, while its costs are MYRdenominated. While Hevea is a beneficiary of the strong dollar, a sharp depreciation of the US$ (or appreciation of MYR) will have a negative impact on profit margins. Escalating raw material prices Any sharp rise in the price of rubberwood will have a negative impact on Hevea s gross margins. Management is of the view that rubberwood prices will rise in 2017. However, the strong US$ will more than offset the raw material price hike. Page 7 of 10 4 July 2017
Valuation and Recommendation Initiate coverage with BUY recommendation and TP of RM2.19 We initiate coverage on HeveaBoard with a BUY recommendation and TP of RM2.19 based on 11x FY18 fully-diluted EPS of 19.8 sen. We like HeveaBoard for its bright earnings outlook, strong balance sheet and decent dividend yield. Page 8 of 10 4 July 2017
Peers Comparison Company Price Market Cap (m) P/E (x) P/B (x) ROE (%) DY (%) (Local) (Local) (USD) 2017 2018 2017 2018 2017 2018 2017 Malaysia Evergreen MYR 0.86 727.6 177.4 0.1 0.1 1.3 1.5 8.3 8.3 2.4 Heveaboard MYR 1.43 770.7 187.9 0.2 0.2 0.9 1.1 #N/A N/A #N/A N/A 5.1 Mieco Chipboard MYR 0.92 480.4 117.1 0.1 0.1 #N/A N/A #N/A N/A 11.7 15.2 N/A Average 0.12 0.15 1.13 1.31 9.98 11.73 3.7 Bloomberg, HLIB Financial Projections Income statement Cashflow FY Dec (RMm) 2015A 2016A 2017E 2018F 2019F FY Dec (RMm) 2015A 2016A 2017E 2018F 2019F Revenue 503.3 540.0 584.9 642.0 672.8 Operating cash flow 139.8 69.1 119.4 133.6 146.8 EBITDA 108.9 115.8 135.0 156.9 167.8 Investing cash flow -8.1-11.3-40.0-15.0-15.0 PBT 82.8 90.3 106.7 127.9 138.0 Financing cash flow -44.9-52.3 0.0 0.0 0.0 Taxation -9.3-9.6-12.8-15.3-16.6 Cash at begin 34.4 121.2 129.8 209.2 327.8 PAT 73.6 80.7 93.9 112.5 121.5 Cash at end 121.2 129.8 209.2 327.8 459.5 Reported net profit 73.6 80.7 93.9 112.5 121.5 Core net profit 83.1 78.9 93.9 112.5 121.5 Issued shares (m) 436.3 501.2 536.0 536.0 536.0 Basic EPS (sen) 16.9 16.1 17.5 21.0 22.7 Core EPS (sen) 19.0 15.7 17.5 21.0 22.7 Diluted EPS (sen) 14.6 15.5 16.5 19.8 21.4 Balance sheet Valuation ratios FY Dec (RMm) 2015A 2016A 2017E 2018F 2019F FY Dec (RMm) 2015A 2016A 2017E 2018F 2019F Non-current assets 242.3 237.9 249.5 235.5 220.7 Core EPS (sen) 19.0 15.7 17.5 21.0 22.7 Current assets 238.8 276.5 372.6 503.6 642.3 P/E (x) 7.5 9.1 8.2 6.8 6.3 Total assets 481.1 514.4 622.2 739.1 862.9 BVPS (RM) 0.8 0.8 1.0 1.2 1.4 P/Book (x) 1.8 1.7 1.5 1.2 1.0 Current liabilities 107.9 80.2 94.3 98.7 101.0 Net gearing (x) CASH CASH CASH CASH CASH Non-current liabilities 27.6 13.0 13.0 13.0 13.0 GDPS (sen) 2.8 7.1 7.0 8.4 9.1 Equity 345.6 421.2 515.1 627.7 749.1 Di. Yield (%) 2.1 5.4 5.3 6.4 6.9 Equity & liabilities 481.1 514.4 622.4 739.3 863.1 PBT margin (%) 16.5 16.7 18.2 19.9 20.5 Core net margin (%) 16.5 14.6 16.1 17.5 18.1 ROA (%) 17.3 15.3 15.1 15.2 14.1 ROE (%) 24.0 18.7 18.2 17.9 16.2 Effective tax rate (%) 11.2 12.0 12.0 12.0 12.0 Assumption Metrics Quarterly financial summary FY Dec (RMm) 2017E 2018F 2019F FY Dec (RMm) 1Q16 2Q16 3Q16 4Q16 1Q17 RM:US$ 4.30 4.30 4.30 Revenue 145.9 121.8 127.2 145.2 158.7 Gross profit 34.2 24.4 26.8 37.4 37.8 Particleboard production 405.0 405.0 405.0 PBT 23.6 17.9 19.2 29.6 29.6 capacity ('000 tonnes) Particleboard utilisation rate (%) 90.0 92.0 95.0 Taxation -3.3-2.8-2.0-1.6-4.3 RTA production capacity 7,200.0 7,920.0 7,920.0 Reported net profit 20.3 15.2 17.2 28.0 25.3 RTA utilisation rate (%) 82.0 85.0 87.0 Core net profit 21.5 12.2 18.1 25.9 25.1 Effective tax rate (%) -0.1-0.2-0.1-0.1-0.1 Reported EPS (sen) 4.0 3.0 3.4 5.6 4.7 Core EPS (sen) 4.0 3.0 3.4 5.6 4.7 Diluted EPS (sen) 3.6 2.7 3.0 4.9 4.5 Page 9 of 10 4 July 2017
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As of 4 July 2017, the analyst, Sia Ket Ee who prepared this report, has interest in the following securities covered in this report: (a) -. Published & Printed by Hong Leong Investment Bank Berhad (43526-P) Level 8, Menara HLA No. 3, Jalan Kia Peng 50450 Kuala Lumpur Tel 603 2168 1168 / 603 2710 1168 Fax 603 2161 3880 Equity rating definitions BUY Positive recommendation of stock under coverage. Expected absolute return of more than +10% over 12-months, with low risk of sustained downside. TRADING BUY Positive recommendation of stock not under coverage. Expected absolute return of more than +10% over 6-months. Situational or arbitrage trading opportunity. HOLD Neutral recommendation of stock under coverage. Expected absolute return between -10% and +10% over 12-months, with low risk of sustained downside. TRADING SELL Negative recommendation of stock not under coverage. Expected absolute return of less than -10% over 6-months. Situational or arbitrage trading opportunity. SELL Negative recommendation of stock under coverage. High risk of negative absolute return of more than -10% over 12-months. NOT RATED No research coverage, and report is intended purely for informational purposes. Industry rating definitions OVERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of more than +5% over 12-months. NEUTRAL The sector, based on weighted market capitalization, is expected to have absolute return between 5% and +5% over 12-months. UNDERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of less than 5% over 12-months. Page 10 of 10 4 July 2017