Thursday, September 14th, 2017


HeveaBoard to have fruitful 2018, with room for higher prices and profit margins: HLIB Research

PETALING JAYA: HeveaBoard Bhd is expected to have a fruitful year in 2018, with room for price adjustment for its products and better margin for its ready-to-assemble (RTA) furniture.

“We walked away from our small group meeting with HeveaBoard’s management feeling encouraged about the group’s near-term prospects,” said Hong Leong Investment Bank (HLIB) Research in its report yesterday.

HeveaBoard exports about 50% of its particleboard output to China, and management highlighted during the meeting there is room to raise its average selling prices (ASPs) for particleboards to China, given the recent strengthening of the yuan against the US dollar.

The company is also constantly working towards producing higher profit margin particleboards, and is one of the first two players in the market to introduce non-added formaldehyde board.

In addition, its new RTA furniture plant saw trial production started last week, with earnings delivery expected by early FY18. The plant focuses mainly on veneer-based RTA furniture, which is able to generate higher profit margins.

HLIB Research believes that there will be an increase in RTA sales by end-FY18, with the Tokyo 2020 Olympics as a catalyst.

“Historically, sales volume growth tends to be higher one to two years before global sports events for example, in FY14 for Rio 2016,” it said.

Meanwhile, Heveagro anticipates cultivation of King Oyster mushrooms by January 2018 and will be able to harvest three tonnes of mushrooms per day.

“The company is looking to sell these mushrooms at around RM10 per kg, a competitive price compared with the current market price of circa RM20 per kg,” said HLIB Research.

However, it noted that labour and rubber logwood issues still linger for the company. Post expansion, the group will need an additional 500 workers in order to achieve optimal production level.

“While the supply of rubber logwood had recovered in June 2017, price has remained sticky on the high side at RM160 per tonne. Nonetheless, the company has been constantly looking for opportunities to move up its value chain and enhance automation processes,” it said.

HLIB Research maintained its “buy” recommendation with unchanged target price of RM2.19. Its sensitivity analysis indicates that every 10 sen appreciation in ringgit against the US dollar will decrease Hevea’s profit by 11%, assuming a constant ASP.

HeveaBoard closed 1.92% higher yesterday at RM1.59 with some 1.54 million shares traded.

AmInvestment Bank keeps ‘hold’ call on Bumi Armada

PETALING JAYA: AmInvestment Bank is keeping its “hold” valuation on Bumi Armada Bhd, despite the group’s long-delayed floating production, storage and offloading (FPSO) vessel Armada Kraken, offloading its first cargo last Tuesday.

Its analyst Alex Goh said in a report yesterday, this is because the charter rates for the FPSO are uncertain pending the client Enquest Plc’s full acceptance of the vessel.

The research house has a fair value of 79 sen for the stock, based on a 20% discount to its sum-of-parts (SOP) valuation of 99 sen per share. The group’s share price closed up one sen to 74 sen yesterday, with some RM4.8 million shares changing hands. It has a market capitsalisation of RM4.34 billion.

Goh said Bumi Armada has indicated that an interim agreement has been reached between the group and Enquest for the payment of the charter rates based on the proportion of FPSO Kraken’s processing capability versus the field’s production rate.

Recall that the FPSO Kraken will be receiving reduced charter rates due to technical problems which have caused lower-than-expected production rates.

“While management indicated that the Kraken charter, even at the lower temporary rates, could still be profitable this year, we remain conservative given the group’s past earnings disappointments,” Goh said.

While the group’s earnings from 2Q’FY17 onwards could potentially improve from the full recognition of the FPSO vessel Armada Olombendo, which achieved first oil on Feb 8 this year, he said it remains cautious on the company’s near-term earnings trajectory given the uncertainties arising from Kraken’s lower charter payments.

He added that even though OSV utilisation rates are improving, management affirmed that charter rates are still weakening against the backdrop of the prevailing oil price which continues to slow down the progress of new potential projects.

The stock currently trades at a fair FY17F price-earnings of 14 times versus the sector’s 20 times due to lingering risks on 2HFY17 earnings recovery.

The Armada Kraken FPSO arrived at the location in the UK’s North Sea on Feb 13, 2017 and completed its hook-up on Feb 15, 2017. The FPSO then achieved first oil on June 28, 2017, four and a half months after its hook-up to the site.

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