Heveaboard Bhd
(Mar 30, RM3.17)
Maintain add call with an unchanged target price of RM4.16: We like Heveaboard Bhd for its strong US dollar-driven earnings momentum and attractive valuations.

Heveaboard is trading at 0.9 times financial year ending Dec 31, 2015 (FY15) price-to-book value (P/BV) for 19% return on equity and an undiluted price-to-earnings ratio (PER) of 5.4 times on FY15 earnings growth of 63%.

The Edge weekly reported over the weekend that according to its sources, Heveaboard was planning to acquire SHH Resources Holdings Bhd (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%).

We believe that the acquisition is unlikely to happen in the near term as Heveaboard and SHH operate in different segments of the furniture market.

Heveaboard is a particle board-related manufacturer that exports to China and Japan while SHH is a solid wood furniture manufacturer that exports to the United States.

We think that The Edge, in suggesting that “SHH’s Pagoh facilities would be an attractive addition to Heveaboard’s facilities in Gemas and Seremban”, has missed the point that acquiring SHH, which does not manufacture particle boards, does not overcome Heveaboard’s near-term challenge of increasing capacity of E0/super E0 particle boards to meet strong demand from China and Japan.

Given that Heveaboard already has state-of-the art particle-board 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 ringgit to the US dollar, SHH’s first-half FY15 net revenue and pre-tax profit were down 15% and 47% respectively due to fewer customer orders. But this is mitigated by a strong net cash position of 24 sen per share or 20% of its share price. — CIMB Research, March 29

This article first appeared in The Edge Financial Daily, on March 31, 2015.