Warrants Update: HeveaBoard-WB a proxy for furniture export growth

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PARTICLEBOARD manufacturer HeveaBoard Bhd has seen renewed interest from investors after reporting strong full-year results for 2014. The firm has been able to penetrate the Japanese market, which is known for conducting strict due diligence and demanding high standards for its furniture imports.

Coupled with the robust demand from China, the company’s customer base for both particleboard and finished furniture products is growing at an impressive rate. The company’s warrant, HeveaBoard-WB, is a cheaper proxy for the mother share, which is said to be undervalued even after accounting for the recent gains in its share price.

The exercise price of HeveaBoard-WB is RM1 with an expiry date of Feb 28, 2020, so it may fit the bill for investors who have a long-term investing horizon.
HeveaBoard’s export markets of Japan and China are the key growth catalysts. According to a Feb 25 note by CIMB Research, its customer base in China is growing at a rate of nearly 50% per annum. The Chinese purchase E1 and E0 particleboard to make ready-to-assemble furniture.

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Owing to strict regulatory requirements, Japan only purchases E0 particleboard from HeveaBoard, which gives the latter higher margins. Exports to Japan make up 14% of the company’s particleboard sales. Its furniture manufacturing arm, HeveaPac Sdn Bhd, generates 60% of its sales from Japan.

HeveaBoard reported a net profit of RM30.48 million for the financial year ended Dec 31, 2014 (FY2014), a 35% jump from RM22.46 million the year before. Earnings per share grew to 30.65 sen from 24.84 sen the year before.

“Bear in mind that HeveaBoard reported an unrealised forex loss of RM3.2 million on its US dollar term loan and a write-off of RM3.5 million on idle assets in the fourth quarter. Excluding this, its core net profit would have been 24% above our forecast of RM30.1 million,” says CIMB Research.

The research house has pegged a 12-month price forecast of RM4.16 for HeveaBoard’s stock, implying an upside potential of 56%. Assuming zero premiums, HeveaBoard-WB would theoretically be worth RM3.16 (RM4.16-RM1.00), representing an 80% upside based on CIMB’s target price.

CIMB Research is forecasting HeveaBoard to achieve revenue and net profit of RM468.7 million and RM54.91 million respectively for FY2015. This implies a core earnings multiple of below nine times based on its present stock price, suggesting that a further price upside is possible.

The premium between the warrant and its underlying mother share has declined substantially from 35% a year ago. Based on last Thursday’s close of RM1.88, HeveaBoard-WB was traded at a small 3.60% premium to its mother share, which closed at RM2.78.

This article first appeared in The Edge Malaysia Weekly, on March 16-22, 2015.