This article first appeared in digitaledge Weekly, on September 14 - 20, 2015.

THE share prices of locally-listed particleboard manufacturers have been on a tear since the beginning of this year, leading many to believe they have missed the boat on investing in the likes of Evergreen Fibreboard Bhd, HeveaBoard Bhd and Mieco Chipboard Bhd. Nevertheless, others believe the valuations of these counters are still reasonable.

Year to date, the share prices of Evergreen, HeveaBoard and Mieco have advanced 217%, 193% and 160% to close at RM1.92, RM1.20 and 97.5 sen respectively last Wednesday.

The rally was mainly attributed to optimism that wood-based product manufacturers, being export-oriented, are largely expected to benefit from the stronger US dollar.

HeveaBoard group managing director Yoong Hau Chun tells digitalEdge Weekly that a PER of 8 to 10 times is generally considered fair for particleboard manufacturers.

“During our initial public offering (IPO), our underwriter was willing to give us a PER of 8 times. I always believe that stock valuation is tied up with financial performance. We will let the investors judge us ... if they can give us a better valuation, I think we deserve it. If not, we can’t keep harping on it,” he says.

Yoong stresses that HeveaBoard has no plan to raise fresh capital in the near future, hence, the share price would not have much influence on its business plan at the moment.

HeveaBoard closed at RM1.20 for a market capitalisation of RM503.5 million as at last Wednesday. By annualising its net profit of RM30 million for its first half to June 30, 2015 (1HFY15), it is trading at a PER of 8.4 times.

It is worth noting that theedgemarkets.com had on Sept 1 highlighted HeveaBoard as a stock with positive momentum, with a high likelihood of a corporate exercise.

Looking at the PER, Evergreen (fundamental: 1.00; valuation: 0.30), with a forward PER of 11.2 times, seems to be trading at a more expensive level compared with its peers, but the group’s chief operating officer and executive director Kuo Jen Chiu begs to differ.

“We do not believe a PER of 11 to 12 times is excessive for our industry. One of the biggest particleboard players listed in Thailand commands a PER in the high teens,” he tells digitalwdge Weekly.

A quick check on Bloomberg shows that Bangkok-based Vanachai Group Public Co Ltd, which produces 1.14 million sqm of particleboard and 870,000 sq m of medium density fibreboard (MDF) board annually,  is trading at a forward PER of 15 times.

Kuo believes that Evergreen’s share price is reflective of its net asset value, which stood at RM1.73 per share as at June 30 this year. The stock is currently trading at price-to-book value (P/BV) of 1.1 times, lower than HeveaBoard’s 1.6 times.

“Evergreen is a market leader in our industry. As the largest and most liquid counter of its kind in Bursa Malaysia, our valuation should not be at a discount to others in the same category,” he explains.

At press time, Mieco (fundamental: 0.65; valuation: 0.90) had not responded to a request for comment. The counter is trading at a P/BV of 0.7 times, the lowest among its peers. In terms of PER, Mieco is trading at a forward PER of 10.3 times based on its annualised net profit of RM19.9 million (1HFY2015 net profit was RM9.95 million).  

The particleboard industry is involved in the production of MDF and particleboard, sometimes known as chipboard. Generally, MDF is more expensive to produce and thus commands a higher average selling price than particleboard.

It is worth noting that an MDF factory is not able to produce particleboard and vice-versa, as the production processes are different. A particleboard factory usually costs less to set up than an MDF factory.

Particleboard is less dense compared to MDF, making it lighter and easier to work with, but the latter is more stable and stronger.

Johor-based Evergreen is an MDF-focused manufacturing firm that also produces particleboard and ready-to-assemble (RTA) furniture. The group claims to be the biggest particleboard player in terms of revenue and output. It has an annual MDF production capacity of 1.3 million cu m (m3) and the largest market share of the local particleboard industry.

Meanwhile, Negeri Sembilan-based HeveaBoard mainly produces particleboard and particleboard-based products, and has an annual capacity of at least 405,000 cu m. The group is also involved in RTA furniture manufacturing as well as the trading of wood panel-related products.

Pahang-based Mieco mainly manufactures particleboard using rubber wood, making it the closest competitor to HeveaBoard. But in terms of market capitalisation, revenue and profit, the company is  the smallest among the three.

So, which of them is a better bet?

“I can’t really talk much about the share price. But if you want to buy into the stock and wait for future returns in terms of dividend yield and so on, I think you can consider that because we aim to be a combination of growth stock and dividend play,” says HeveaBoard’s Yoong.

As for Evergreen, Kuo says the run-up in share price was mainly due to its recovery from a low base to reflect its book value, as well as improvement in its earnings. The company has been profitable since its listing 10 years ago, with the only full-year loss, in 2013.

“With such a positive track record, investors see the turnaround that we are experiencing as an opportunity to invest at cheap valuations since our share price was among the worst hit by trading volatility in past years compared with the other two counters,” he says.

Interestingly, both Evergreen and HeveaBoard have a similar potential upside of about 24%, should the stocks hit their consensus target prices.

In a Sept 3 report, CIMB Research analyst Marcus Chan says the research house continues to recommend that investors accumulate HeveaBoard shares as the counter is seen as an emerging dividend play.

“Dividends are set to rise sharply after its US dollar term loan is fully repaid in 2016. Coupled with very strong anticipated 3Q15 results, investors should take advantage of the recent correction to accumulate the stock,” he writes.

CIMB Research maintains its “add” rating on HeveaBoard, with a target price of RM1.49.

For Evergreen, Hong Leong Investment Bank (HLIB) Research and CIMB Research give it a “buy” call and “add” rating, respectively, while RHB Research maintains its “neutral” call. The consensus target price for Evergreen by the three research houses is RM2.39.

HLIB Research analyst Chye Wen Fei continues to like Evergreen for its strong earnings visibility, underpinned by the weak ringgit versus the US dollar, lower raw material prices, as well as management’s commitment to further improve its overall production efficiency and diversify its product range.

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. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.