HEVEABOARD Bhd’s secured orders for ready-to-assemble (RTA) furniture until Feb 2021 is encouraging, despite uncertain average selling prices (ASPs) in the particleboard segment clouding near term earnings visibility, according to Hong Leong Investment Bank.
“Since the movement control order (MCO) disruptions on furniture makers’ operations in March and April, Malaysia furniture export sales have surpassed pre-Covid-19 levels as global lockdowns and work-from-home arrangements have led consumers to purchase new furniture.”
“We are positive on this development, as Hevea has secured orders until Feb 2021. Additionally, we are encouraged by the fact that Hevea has received interest from US-based companies to supply RTA furniture,” said HLIB analyst Gan Huan Wen.
The analyst also noted that the US market accounts for more than 5% of Hevea’s RTA sales.
However, as global furniture product demand spikes, Gan noted that Hevea’s workforce is already working at full capacity.
“While Hevea has the factory space to increase RTA production by 20%, we understand that production is bottlenecked by the availability of foreign labour due to the freezing of hiring foreign labour until the end of the year.”
“Additionally, we note that the strengthening of the ringgit, which is currently at RM4.15 per US Dollar compared to the 1H20 average of RM4.25 per US Dollar, does not bode well for
Hevea as all their export sales are denominated in the US Dollar,” said Gan.
The analyst noted that the rampant supply glut of fibreboard from China and other neighbouring countries in previous years has led to Malaysian fibreboard makers losing competitiveness, evidenced by declining export sales.
“This has led to ASP declines of between 15% to 20%. Post-MCO, the increased demand of particleboard should lead to better sales volumes going into the second half of 2020.”
“However, Hevea has yet to see higher ASPs as the existing supply in the market is sufficient to meet current demands,” said Gan.
At the same time, a federal gazette had banned the importing of particleboard and fibreboard effective from Oct 17, 2020, but the analyst noted that furniture makers may be permitted to apply for a licence to import particleboard and fibreboard as usual.
“At this juncture, the impact of the gazette is unclear,” said Gan.
The analyst also noted that while higher particleboard ASPs from the federal gazette would benefit Hevea’s particleboard division, it would impact their RTA division as particleboard accounts for between 70% to 80% of the RTA division’s raw material cost.
HLIB maintains a hold call on Hevea, with a higher target price of 48 sen from a previous 40 sen.
At the end of the morning’s trading session, Hevea’s shares were last done at 48.5 sen, down 4 sen, with 14.6 million shares traded. – Sep 9, 2020
