PARTICLEBOARD MAKER Heveaboard Bhd, whose share price has soared lately, plans to buy wood-based furniture maker SHH Resources Holdings Bhd, say sources.

The two companies are discussing the details, for instance, whether the deal will be a cash settlement or a share swap, the sources add.

It is also not known how the takeover exercise will be structured, whether Heveaboard (fundamental: 1.3; valuation: 1.8) will buy out SHH Resources (fundamental: 2.5; valuation: 2.4) or only acquire the latter’s assets and liabilities.

The acquisition could be satisfied by a combination of a share swap and cash. In such a scenario, Heveaboard may issue new shares to the existing shareholders of SHH Resources, making them a part of the enlarged company.

With over 17ha of fully integrated manufacturing facilities in Pagoh, Johor, and the use of the latest technology, SHH Resources is able to cater for buyer requirements in large orders. This plant would be an attractive addition to Heveaboard’s operations in Gemas and Seremban.

SHH Resources is linked to businessman Tan Sri Vincent Lee Fook Long, who has a 5.57% direct stake in the company and sits on its board, while Naga DDB Sdn Bhd — one of the largest advertising agencies in the country that was founded by Lee — owns 11.16%.

It remains to be seen if Lee has any intention to sell his holding in SHH Resources, whose share price has surged 56% since February and closed at RM1.38 last Friday. The furniture maker generated revenue of RM105 million in the financial year ended June 30, 2014 (FY2014) while its net profit grew fivefold to RM8.2 million from RM1.5 million the year before.

Founder-cum-managing director Datuk Teo Wee Cheng is the company’s largest shareholder while his wife Datin Teo Chan Huat is the deputy managing director. The couple jointly hold a 17.51% stake in the company.

Shares of Heveaboard and SHH Resources have jumped to multi-year highs in tandem with the current bullish sentiment on the export-oriented furniture industry.

Heveaboard soared to an all-time high of RM3 last Thursday and SHH Resources leapt to a 14-year high of RM1.38 last Friday.

Year to date, Heveaboard and SHH Resources have risen 77% and 75% respectively, taking their market capitalisation to RM293.4 million and RM69 million. And their price-earnings ratios are still below the market average of 10 times.

Despite the spike in its share price, SHH Resources’ valuation is not that pricey. It is trading at a price-to-book value of 0.92 times compared with the industry average of 1.21 times.

In the company’s 2014 annual report, its landed properties — including offices and furniture manufacturing and warehousing facilities — were valued at RM35.8 million as at June 30.

As for Heveaboard, its cash pile stood at RM35.6 million and its short-term borrowings at RM27.3 million as at end-2014. The company can afford to gear up as it has managed to bring down its gearing to 17% from 75% in FY2011.

Corporate observers say buying out SHH Resources will enable Heveaboard to expand its downstream operation, where it manufactures ready-to-assemble furniture and trades wood panel-related products.

SHH Resources produces wood-based furniture such as bedroom suites, dining suites, entertainment sets, home-office furniture and armoires.

Should the takeover exercise materialise, the merged entity would have a combined market capitalisation of at least RM360 million.

In comparison, Latitude Tree Holdings Bhd’s market capitalisation is RM622 million while that of the likes of Homeritz Corp Bhd, Lii Hen Industries Bhd and Poh Huat Resources Holdings Bhd is about RM230 million to RM250 million.

Based on the industry average and its net asset value per share of RM1.50, SHH Resources could potentially be valued at RM1.815 per share, which translates into a market capitalisation of RM90.75 million — 31% higher than its current value.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 30 - April 5, 2015.

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