HEVEA (5095) - HeveaBoard Bhd - Strong finish
Target RM4.16 (Stock Rating: ADD)
Hevea’s FY14 core net profit of RM30.5m was in line with our RM30.1m forecast despite unrealised forex losses and asset write-offs. A surprise interim dividend of 1.5sen was announced, above our expectation, signaling a V-shaped recovery. We raise our FY15 DPS forecast by 50% to 6sen (4 sen previously), and raise our FY15-16 EPS by c.3% on higher margin assumptions. Maintain Add with a higher SOP-based target price. Potential catalysts are the continued strength of the dollar and margin expansion.
Underlying margin improvement
Hevea recorded an unrealised forex loss of RM3.2m on its US$ term loan and a write-off of RM3.5m on its idle assets/inventory in 4Q; excluding these, net profit would have been 24% above our forecast. Underlying gross margin for FY14 was 15%, 50bp above our forecast of 14.5%, a signal that Hevea’s shift towards higher margin products (E0 and super E0 boards) is starting to bear fruit.
Ohayo Japan
We believe that investors can look forward to a strong 1QFY15. The furniture division is traditionally strong in 1Q from Japanese demand, mitigated by softness in the particleboard division (given the CNY holidays in China, which accounts for 40% of particleboard sales). We estimate that Hevea managed to lock in an exchange rate of close to RM3.60/US$1 in 1Q. Japanese demand will continue to be driven by 1) the build-out of Olympics 2020, and 2) increasing imports of super E0 boards as Japanese particleboard manufacturers lose their competitiveness due to the difficulty in sourcing wood residues.
FY15 a bonanza year
We forecast an average exchange rate of RM3.60/US$1 for FY15. For FY14, we estimate that Hevea realised RM3.28/US$1 for its revenues. Our sensitivity analysis indicates that a 1% strengthening of the US$ increases Hevea’s EPS by 7.6%. We have also imputed a 5% trade discount. The longer Hevea is able to hold off trade discounting, the greater the positive impact on its bottomline would be. From our industry channel checks, we gather that typical trade discounts range from 2-3%. We estimate that every 1% pt lower trade discount will boost its FY15 EPS by c.8%. With strong free cashflow in FY15, we expect Hevea to turn cash positive by year-end and raise its dividends substantially.
Source: CIMB Daybreak - 26 February 2015
Target RM4.16 (Stock Rating: ADD)
Hevea’s FY14 core net profit of RM30.5m was in line with our RM30.1m forecast despite unrealised forex losses and asset write-offs. A surprise interim dividend of 1.5sen was announced, above our expectation, signaling a V-shaped recovery. We raise our FY15 DPS forecast by 50% to 6sen (4 sen previously), and raise our FY15-16 EPS by c.3% on higher margin assumptions. Maintain Add with a higher SOP-based target price. Potential catalysts are the continued strength of the dollar and margin expansion.
Underlying margin improvement
Hevea recorded an unrealised forex loss of RM3.2m on its US$ term loan and a write-off of RM3.5m on its idle assets/inventory in 4Q; excluding these, net profit would have been 24% above our forecast. Underlying gross margin for FY14 was 15%, 50bp above our forecast of 14.5%, a signal that Hevea’s shift towards higher margin products (E0 and super E0 boards) is starting to bear fruit.
Ohayo Japan
We believe that investors can look forward to a strong 1QFY15. The furniture division is traditionally strong in 1Q from Japanese demand, mitigated by softness in the particleboard division (given the CNY holidays in China, which accounts for 40% of particleboard sales). We estimate that Hevea managed to lock in an exchange rate of close to RM3.60/US$1 in 1Q. Japanese demand will continue to be driven by 1) the build-out of Olympics 2020, and 2) increasing imports of super E0 boards as Japanese particleboard manufacturers lose their competitiveness due to the difficulty in sourcing wood residues.
FY15 a bonanza year
We forecast an average exchange rate of RM3.60/US$1 for FY15. For FY14, we estimate that Hevea realised RM3.28/US$1 for its revenues. Our sensitivity analysis indicates that a 1% strengthening of the US$ increases Hevea’s EPS by 7.6%. We have also imputed a 5% trade discount. The longer Hevea is able to hold off trade discounting, the greater the positive impact on its bottomline would be. From our industry channel checks, we gather that typical trade discounts range from 2-3%. We estimate that every 1% pt lower trade discount will boost its FY15 EPS by c.8%. With strong free cashflow in FY15, we expect Hevea to turn cash positive by year-end and raise its dividends substantially.
Source: CIMB Daybreak - 26 February 2015
