Hevea Board

All Eyes On Coming Quarter

Publish date: Fri, 26 Dec 2014, 08:24 PM

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1. Background Information

Hevea is principally involved in the manufacturing of particle boards and Ready To Assemble ("RTA") furnitures by using rubber wood as raw materials.

The company has market cap of RM159 mil (99.4 mil shares and latest closing price of RM1.60).

Based on historical profit of RM22.3 mil, PER is 7.1 times.

Based on net assets of RM262 mil, PBR is 0.6 times.

With RM35 mil cash and RM87.7 mil borrowings, net gearing is 0.2 times.

The company paid dividend of 2 sen per share last year. Dividend yield is 1.25%.

2. Historical Profitability

The following table sets out the group's P&L for FY2013 and 9 months ended 30 September 2014. 

									9 months
	Q1	Q2	Q3	Q4	FY2013	Q1	Q2	Q3	FY2014
Revenue	103.6	94.5	86.3	105.1	389.5	104.7	106.9	95.7	307.3
> Particleboards	38.5	42.3	45.1	45.3	171.2	37.2	46.4	46.4	130.0
> RTA products	58.9	47.3	35.9	54.3	196.4	62.6	55.2	44.5	162.3
> others	6.1	5.0	5.3	5.6	22.0	4.9	5.3	4.7	14.9
Gross profit	10.5	12.4	13.9	19.9	56.7	14.4	15.0	13.8	43.2
others	(0.0)	(0.7)	(1.0)	(0.4)	(2.1)	0.8	1.0	(0.5)	1.3
operating exp	(5.2)	(5.4)	(5.4)	(8.1)	(24.1)	(6.0)	(6.3)	(6.4)	(18.7)
forex gain / (loss)	(0.9)	(1.5)	(2.2)	(0.2)	(4.9)	0.2	1.0	(1.1)	0.1
Finance cost	(1.82)	(1.70)	(1.50)	(1.55)	(6.6)	(1.37)	(0.73)	(0.62)	(2.7)
PBT	3.5	4.6	6.1	9.8	23.9	7.8	9.0	6.3	23.1
> Particleboards	(0.2)	(0.5)	2.0	3.1	4.4	2.1	4.4	4.1	10.6
> RTA products	3.3	4.9	3.9	6.6	18.6	5.5	4.3	2.0	11.8
> others	0.4	0.2	0.2	0.1	0.9	0.2	0.3	0.2	0.7
PBT margin (%)	3.3	4.8	7.0	9.3	6.1	7.5	8.4	6.6	7.5
> Particleboards	(0.4)	(1.2)	4.3	6.8	2.5	5.5	9.5	8.9	8.1
> RTA products	5.5	10.3	10.8	12.2	9.5	8.7	7.8	4.4	7.2
> others	5.7	4.1	4.3	2.3	4.1	5.0	5.8	3.9	4.9
Tax	(0.4)	(0.5)	(0.5)	(0.2)	(1.6)	(0.5)	(0.5)	(0.5)	(1.5)
Net profit	3.1	4.1	5.5	9.6	22.3	7.3	8.5	5.8	21.6
USD : RM	3.081	3.070	3.240	3.207	3.150	3.297	3.234	3.193	3.241
Gross margin (%)	10.1	13.1	16.1	18.9	14.6	13.8	14.0	14.4	14.0
effective interest rate (%)	6.04	5.56	5.05	5.09	5.44	5.57	3.01	2.85	3.81

Some key observations :-

(a) Particle boards and RTA furniture contributed 50% : 50% of revenue respectively.

(b) With the bulk of its products exported, the group's profitability is sensitive to exchange rate movement. For example : earnings jumped in Q3 2013 when US Dollars strengthened against RM. 

(c) Interest payment on downward trend. For example : interest charges in Q1 2013 was RM1.82 mil. However, in Q3 2014, interest charges was only RM0.62 million, a reduction of 66%. 

The reduction of interest charges was due to both reduction in borrowings (in Q1 2013, loans outstanding was RM120.5 mil. In Q3 2014, loans outstanding was RM87.4 mil) as well as lower effective interest rates (6.04% in Q1 2013 dropped to 2.85% in Q3 2014. The lower rate was probably due to better credit rating pursuant to decline in gearing)

(d) In FY2013, RTA products reported PBT of RM18.6 mil vs Partcle Board's RM4.4 mil. However, in FY2014, follwoing revamp of product line (by moving upscale), Particle Boards had overtaken RTA products to be a more important profit contributor. 

The coming quarter would be interesting to see how RTA products division will fare.

3. Continuously Degearing

The group used to be highly geared. However, over the past few years, the group has been consistently paring down its debts.

As at 31 December 2013, the group has loans of RM121 mil. However, by September 2014, loans has dropped to RM87 mil, a reduction of closed to RM32 mil.

Currently, the group's net gearing is only 0.2 times. As far as balance sheet is concerned, the group is already out of the wood (compared to few years ago).

									9 months
	Q1	Q2	Q3	Q4	FY2013	Q1	Q2	Q3	FY2014
cash	12.8	15.9	18.9	32.3	32.3	30.4	37.3	35.0	35.0
loans	120.5	122.3	118.8	121.8	121.8	98.5	96.8	87.4	87.4
S funds	211.7	215.8	221.3	230.9	230.9	238.0	251.8	261.8	261.8
Net gearing (times)	0.51	0.49	0.45	0.39	0.39	0.29	0.24	0.20	0.20
Net loan repayment	17.8	0	6.8	0.9	24.2	24.0	1.5	6.4	31.8
Capex	1.1	0.5	0.7	7.6	9.9	0.0	0.8	6.0	6.3

4. Concluding Remarks

The group exports its products to China, Japan and several other countries.

This coming quarter will be interesting. Let's see how the group will perform.

I have been deliberately vague in my recommendation. Please go through the figures in the P&L table to arrive at your own conclusion.

Have a nice evening.