HEVEA (5095) - Hevea expected to turn net cash by end-2015
HeveaBoard Bhd
(Feb 10, RM2.50)
Initiate coverage with an add rating and sum-of-parts (SOP)-based target price (TP) of RM4.06. Hevea is a prime beneficiary of the strong dollar, with US dollar revenues and a falling ringgit cost base.
In addition, margins are expanding from a shift to higher-margin products and falling input costs. With its deleveraging set to complete by financial year 2017 (FY17), a dividend story is also emerging.
We initiate coverage on Hevea with an “add” rating and SOP-based TP of RM4.06 (85% upside).
We value its business at 10 times FY15’s price-earnings ratio (PER) in line with the timber sector PER.
This year should see a strong rerating as investors reward US dollar plays. With strong free cash flow, we believe Hevea will turn net cash by end-2015 and start raising dividends substantially, another potential rerating catalyst.
Hevea manufactures and exports particle boards (pic) and ready-to-assemble furniture. About 95% of its revenues are US dollar-based, while its cost is ringgit-based. Hevea is a margin expansion story, driven by the strong dollar, shift to higher-margin products, steady to declining costs (lower glue prices, potential drop in electricity prices), and falling depreciation and interest costs.
Our sensitivity analysis indicates that a 1% strengthening of the US dollar increases Hevea’s FY15 earnings per share (EPS) by 7.6%. More than 50% of the group’s revenues are derived from China and Japan, where demand for low formaldehyde emission particle boards is very strong. These products command substantial pricing premium over regular E1/E2 particle boards.
Its Chinese customers are growing at 40% to 50% year-on-year while Japanese demand will be driven by the buildout of the Olympics 2020 facilities, and increasing imports of super E0 boards as Japanese particle board manufacturers lose their competitiveness due to the difficulty in sourcing wood residues.
With 69% EPS growth for FY15 and average forecast return on equity of 18.2%, Hevea is undervalued, in our view. The stock is trading at only four times FY15 PER and 0.7 times of price-to-book value.
We value Hevea’s business at 10 times fully-diluted FY15 PER, in line with the timber sector PER, which is also a 30% discount to the target market PER to reflect the industry’s cyclicality, and net cash per share of 30 sen, assuming the warrants are fully converted.
We expect Hevea to turn net cash by end-2015, putting it in a strong position to increase its dividends substantially.— CIMB Research, Feb 9
This article first appeared in The Edge Financial Daily, on February 11, 2015.
http://www.theedgemarkets.com
HeveaBoard Bhd
(Feb 10, RM2.50)
Initiate coverage with an add rating and sum-of-parts (SOP)-based target price (TP) of RM4.06. Hevea is a prime beneficiary of the strong dollar, with US dollar revenues and a falling ringgit cost base.
In addition, margins are expanding from a shift to higher-margin products and falling input costs. With its deleveraging set to complete by financial year 2017 (FY17), a dividend story is also emerging.
We initiate coverage on Hevea with an “add” rating and SOP-based TP of RM4.06 (85% upside).
We value its business at 10 times FY15’s price-earnings ratio (PER) in line with the timber sector PER.
This year should see a strong rerating as investors reward US dollar plays. With strong free cash flow, we believe Hevea will turn net cash by end-2015 and start raising dividends substantially, another potential rerating catalyst.
Hevea manufactures and exports particle boards (pic) and ready-to-assemble furniture. About 95% of its revenues are US dollar-based, while its cost is ringgit-based. Hevea is a margin expansion story, driven by the strong dollar, shift to higher-margin products, steady to declining costs (lower glue prices, potential drop in electricity prices), and falling depreciation and interest costs.
Our sensitivity analysis indicates that a 1% strengthening of the US dollar increases Hevea’s FY15 earnings per share (EPS) by 7.6%. More than 50% of the group’s revenues are derived from China and Japan, where demand for low formaldehyde emission particle boards is very strong. These products command substantial pricing premium over regular E1/E2 particle boards.
Its Chinese customers are growing at 40% to 50% year-on-year while Japanese demand will be driven by the buildout of the Olympics 2020 facilities, and increasing imports of super E0 boards as Japanese particle board manufacturers lose their competitiveness due to the difficulty in sourcing wood residues.
With 69% EPS growth for FY15 and average forecast return on equity of 18.2%, Hevea is undervalued, in our view. The stock is trading at only four times FY15 PER and 0.7 times of price-to-book value.
We value Hevea’s business at 10 times fully-diluted FY15 PER, in line with the timber sector PER, which is also a 30% discount to the target market PER to reflect the industry’s cyclicality, and net cash per share of 30 sen, assuming the warrants are fully converted.
We expect Hevea to turn net cash by end-2015, putting it in a strong position to increase its dividends substantially.— CIMB Research, Feb 9
This article first appeared in The Edge Financial Daily, on February 11, 2015.
http://www.theedgemarkets.com
