Target RM3.17 (Stock Rating: ADD)
The Edge reported over the weekend that Hevea is interested in acquiring SHH Resources Holdings Bhd (SHH). We believe that this is unlikely to happen as 1) SHH, while also operating in the furniture industry, makes solid wood furniture, a different market segment from Hevea’s particleboard furniture, 2) acquiring SHH does not overcome Hevea’s main challenge, i.e. its capacity constraints in meeting burgeoning particleboard demand from China/Japan. We retain our forecasts, SOP-based target price and Add rating. Strong 1QFY15 results are a potential re-rating catalyst.
What Happened
The Edge reported over the weekend that according to its sources, Hevea was planning to acquire SHH. It even quoted the sources as saying that details of the acquisition were being discussed. SHH has fully integrated furniture manufacturing facilities on 17ha in Pagoh, Johor. The largest shareholders are founder and Managing Director, Datuk Teo Wee Cheng (he and his wife Datin Teo own 17.5%) and Naga DDB Sdn Bhd (11.2%).
What We Think
We believe that the acquisition is unlikely to happen in the near term as Hevea and SHH operate in different segments of the furniture market. Hevea is a particleboard-related manufacturer that exports to China/Japan while SHH is a solid wood furniture manufacturer that exports to USA. We think that the Edge, in suggesting that “SHH’s Pagoh facilities would be an attractive addition to Hevea’s facilities in Gemas and Seremban”, has missed the point that acquiring SHH, which does not manufacture particleboards, does not overcome Hevea’s near-term challenge of increasing capacity of Eo/super E0 particleboards to meet strong demand from China and Japan. Given that Hevea already has state-of-the art particleboard facilities in Gemas, only 1) reducing E1 boards in favour of E0/super E0 boards and 2) extending/adding pressing lines could resolve this issue. If the acquisition materialises, we would be neutral on the deal. Despite a weaker RM/USD, SHH’s 1HFY06/15 net revenue and pre-tax profit was down 15% and 47% respectively, from lower customer orders. But this is mitigated by a strong net cash position of 24 sen/share, 20% of its share price.
What You Should Do
Remain invested in Hevea. We like Hevea for its strong US$-driven earnings momentum and attractive valuations. Hevea is trading at 0.9x FY15 P/BV for 19% ROE and an undiluted P/E of 5.4x on FY15 earnings growth of 63%.
Source: CIMB Daybreak - 30 March 2015
