Labour shortage weighs on earnings of HeveaBoard

This article first appeared in The Edge Financial Daily, on February 26, 2018.
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KUALA LUMPUR: A shortage of foreign workers is putting a drag on particleboard maker HeveaBoard Bhd’s earnings, and no end is in sight.

The group’s ready-to-assemble (RTA) manufacturing segment was affected by the shortages as seen in the third quarter ended Sept 30, 2017 (3QFY17), which saw the segment’s pre-tax profit drop 16.7% to RM27.09 million from RM32.51 million in 3QFY16.

According to HeveaBoard managing director Yoong Hau Chun, the shortage of foreign workers during 3QFY17 had resulted in higher operational costs as optimum production capacity was not achieved.

He noted that the group had 1,500 workers in 3QFY17 compared with its optimal headcount of 2,300 workers.

“During the quarter under review, we had as low as 1,500 workers and this had impacted us as we needed more workers to start our new factory [which was completed in August last year]. This resulted in a backlog of orders to fulfil, which impacted our production efficiencies,” Yoong told The Edge Financial Daily via an email response. Currently, HeveaBoard has about 1,900 workers.

HeveaBoard’s net profit more than halved to RM7.17 million in 3QFY17 from RM17.23 million in 3QFY16, on the back of a 7.2% drop in revenue to RM118.01 million from RM127.15 million in 3QFY16.

The dismal quarterly performance dragged down the group’s net profit for the cumulative nine months ended Sept 30, 2017 (9MFY17) to RM48.8 million, a 7.3% decline from RM52.66 million a year ago. Revenue, however, rose 4.3% to RM411.99 million from RM394.83 million. The group is expected to announce its 4QFY17 results tomorrow.

But analysts are more upbeat about the outlook for HeveaBoard going into FY18 as the group is expecting additional workers by the end of March, which will help boost its RTA manufacturing segment.

While Yoong said the additional 300 to 500 workers will certainly help with clearing its backlog of orders and fulfilling the current demand, he expects 2018 to remain a challenging year for the group.

“We understand that the hiring and worker permit renewal hiccups were related to the new government policy introduced earlier where the group faced a huge shortfall of 450 foreign workers, especially with the trial orders coming from its new veneer-based products from Japan,” said JF Apex Securities analyst Lee Chung Cheng in a report dated Feb 12.

Lee said following a recent meeting with Heveaboard’s management, it was revealed that the group is relying on local workers for its production workforce. “However, management highlighted that the domestic factory workers are less reliable as retention rate is as low as 30%.”

Lee also noted that HeveaBoard is expecting to see a 20% decline in its shipments of RTA furniture, to 480 containers per month from 600 containers per month previously.

“We opine that the group may not be able to fully meet the demand from Japan for its new veneer-based RTA furniture products with the lingering labour issues,” he added.

Apart from labour shortage issues, the unfavourable foreign exchange (forex) movement has also weighed on Heveaboard’s earnings prospects.

“The management highlighted that the group hedges its 40% sales proceeds to mitigate the risk of forex fluctuations. With the recent sharp rally in the ringgit against the US dollar, that is, from as high as 4.40 in the fourth quarter of 2017 to the current 3.90, the management acknowledged that the negative impacts on the group are unavoidable with the time lag of about two to three months for the group to partially price in the forex factor to customers,” said Lee.

Nevertheless, Yoong expects demand in both the particleboard and RTA businesses to remain intact amid challenging external factors.

While there is currently a glut in the particleboard market which has resulted in a lower selling price, Yoong is expecting the market to see some consolidation in the next one to two years. “Some of the smaller and non-efficient plants will be forced out. On our part, HeveaBoard will remain being a niche player and that should give us a competitive edge,” he added.

For FY18, the group also expects additional revenue coming from its king oyster mushroom cultivation business which was launched this month.

“We expect to reap harvest [at the end of] March or April for our first phase of production. We aim to target the local retail segment,” said Yoong.

Yoong told The Edge Financial Daily in a Sept 6, 2017 interview that the group was aiming for a RM10 million revenue and RM3 million profit from its mushroom cultivation business for FY18.

Meanwhile, JF Apex’s Lee is forecasting HeveaBoard’s net profit to come in at RM62.6 million and RM71.9 million for FY17 and FY18 respectively. Revenue is projected at RM523.8 million and RM549.4 million for FY17 and FY18 respectively.

“We introduce our 2019 net profit estimate of RM88.6 million with expectations of meaningful sales rebound and margin recovery amid stabilisation of the ringgit against the US dollar, [resolution] of the labour issue and easing of overcapacity,” he said.

In a report dated Dec 22, Hong Leong Investment Bank Research analyst Rachael Hong Hui Chee estimated HeveaBoard’s net profit to be at RM66.2 million and RM79.8 million for FY17 and FY18 respectively, as well as to record a revenue of RM578.1 million and RM615.2 million in FY17 and FY18 respectively.

Both Lee and Hong have a “buy” call on the stock with a lower target price of RM1.27 and RM1.42 respectively.

“We maintain our “buy” call on the stock as we believe its value will  emerge following the recent slump in share price,” said Lee.

“We continue to like HeveaBoard for its healthy and strong balance sheet (net cash per share of 35.8 sen as at Sept 30, 2017), generous dividend payout (minimum payout of 30%), and its ongoing effort in creating higher-margin products,” said Hong.

HeveaBoard shares closed one sen or 1.06% lower at 93 sen last Friday, giving it a market capitalisation of RM518.35 million. The stock has fallen 36% over the past year.