HeveaBoard Bhd
(Sept 4, RM1.07)
We maintain our sum-of-parts-based target price at RM1.49 and add rating: HeveaBoard Bhd held its maiden analysts’ briefing last Thursday. We expect strong third quarter financial year 2015 (3QFY15) results and aggressive paring of US dollar debt to continue driving HeveaBoard’s rerating.

We estimate HeveaBoard’s US dollar debt to be fully repaid by mid-2016, allowing it to then focus on rewarding shareholders. 

We raise our FY16-FY17 dividend per share (DPS) by 100% to 200% to four to six sen (from two sen), which translates into a yield of 4% to 6%. Coupled with very strong anticipated 3QFY15 results, investors should take advantage of the recent correction to accumulate the stock. 

We attended HeveaBoard’s first half FY15 (1HFY15) briefing by the senior management team last Thursday. Over 30 fund managers and analysts were present at this full-house event. 

The key takeaways are: i) the use of the mobile chipping method for raw material recovery over the past three years improved yields by 30%, thereby lowering its effective raw material cost; ii) HeveaBoard is seeing increasing E0 particle board (PB) orders from existing markets like South Korea and India; iii) it also expects an increase in PB/furniture demand from Japan in FY16, due to scarce raw material supply for its Japanese competitors, aggressive inventory restocking by customers prior to the sales tax increase in 2017 and pre-2020 Olympics spending; iv) a new range of E0/super E0 ready-to-assemble furniture will be sold online; and v) dividends are set to rise sharply after HeveaBoard’s US dollar-term loan is fully repaid in 2016.

There were no major surprises from the briefing. However, we have turned more bullish about HeveaBoard’s dividend outlook as the management hinted that after its US dollar debt is fully repaid (we estimate by mid-2016), its capital management efforts will be focused on improving returns to shareholders. 

HeveaBoard spends about RM26 million per annum in repayments for its US dollar debt. 

When this is completed, the resultant cash flow savings could be used to pay dividends (about 6.5 sen), excluding free cash flow generated annually from its business operations. Our revised four to six sen DPS is, therefore, still conservative in our view.

We continue to recommend that investors accumulate the stock. 

Key rerating catalysts are strong dividend upside potential and strong 3QFY15 results. We estimate that HeveaBoard realised an average US dollar to ringgit exchange rate of 3.63 in 1HFY15, whereas the rate is trading above 4.00 currently. — CIMB Research, Sept 3

This article first appeared in digitaledge Daily, on September 7, 2015.