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This article first appeared in The Edge Financial Daily on July 21, 2017

HeveaBoard Bhd 
(July 20, RM1.62)
Maintain buy recommendation with an unchanged target price of RM2.19:
We walked away from our recent plant visit and meeting with management feeling encouraged about the group’s earnings prospects (arising from various initiatives to improve profitability).

HeveaBoard Bhd is able to replace 10% of its rubberwood requirements with leftover logging materials (such as stumps and branches) via the investment into mobile chipper (used to process leftover materials from logging), which are more readily available and at least 30% cheaper relative to rubber log wood. 

Having seen positive results from its investment, we understand that HeveaBoard has plans to increase the usage of leftover logging materials further (to 30% of its total rubberwood requirements in the medium term) via investment into more mobile chippers.

As part of its ongoing efforts to stay head and shoulders above the other industry players, HeveaBoard has recently added no added-formaldehyde board (which has higher quality and an average selling price relative to Super E0 board) into its particle board product lines.

We understand that construction of the new ready-to-assemble (RTA) furniture line (which will be producing higher–margin products for Japanese customers) is 60% complete and on track for completion by end-2017. Given the good progress it has made, we reiterate our view that the new RTA line will start contributing to HeveaBoard’s bottom lines by 2018.

The venture into king oyster mushroom cultivation will be carried out in three phases (capacity of 3,000kg mushrooms per day in each phase). We understand that HeveaBoard is currently working on phase 1, and targeting for commercialisation by end-2017. 

While profitability of this venture will likely be much higher compared with its bread and butter (that is particle board and RTA furniture), we believe contribution will likely be insignificant, given HeveaBoard’s large earnings base.

Risks to our call include high dependency on foreign workers, escalating raw material prices and fluctuation on foreign currency (US dollar).

We continue to like HeveaBoard for its healthy and strong balance sheet (net cash/share of 10.32 sen as at March 31, 2017), generous dividend payouts (dividend payout ratio of 45% in financial year 2016), and its ongoing effort in creating higher margin products. — Hong Leong Investment Bank Research, July 20
 

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