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HEVEA (5095) - HeveaBoard Bhd - Boardwalk empire

Target RM4.06 (Stock Rating: ADD)

Hevea is a prime beneficiary of the strong dollar, with US$ revenues and a falling RM 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 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 10x FY15 P/E in line with the timber sector P/E. 2015 should see a strong re-rating as investors reward US$ plays. With strong free cashflow, we believe Hevea will turn net cash by end-15 and start raising dividends substantially, another potential re-rating catalyst.

We initiate coverage on Hevea with an Add rating and SOP-based TP of RM4.06 (85% upside). We value its business at 10x FY15 P/E in line with the timber sector P/E. 2015 should see a strong re-rating as investors reward US$ plays. With strong free cashflow, we believe Hevea will turn net cash by end-15 and start raising dividends substantially, another potential re-rating catalyst.

Margin expansion
Hevea manufactures and exports particleboard and ready-to-assemble (RTA) furniture. About 95% of its revenues are US$-based, while its cost is RM-based. Hevea is a margin expansion story, driven by 1) the strong dollar, 2) shift to higher margin products, 3) steady to declining costs (lower glue prices, potential drop in electricity prices), and 4) falling depreciation and interest costs. Our sensitivity analysis indicates that a 1% strengthening of the US$ increases Hevea’s FY15 EPS by 7.6%.

Rising demand from China/Japan
More than 50% of the group’s revenues are derived from China and Japan, where demand for low formaldehyde emission particleboards is very strong. These products command substantial pricing premium over regular E1/E2 particleboards. Its Chinese customers are growing at 40-50% yoy while Japanese demand will be driven by 1) the build-out of the Olympics 2020 facilities, and 2) increasing imports of super E0 boards as Japanese particleboard manufacturers lose their competitiveness due to the difficulty in sourcing wood residues.

Deep value
With 69% EPS growth for FY15 and average forecast ROE of 18.2%, Hevea is very undervalued, in our view. The stock is trading at only 4x FY15 P/E and 0.7x P/BV. We value Hevea’s business at 10x fully-diluted FY15 P/E, in line with the timber sector P/E, which is also a 30% discount to the target market P/E 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-15, putting it in a strong position to increase its dividends substantially.

Source: CIMB Daybreak - 10 February 2015
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