Wood Based Manufacturing - Survival of the Fittest
Author: HLInvest | Publish date:
We maintain our Neutral view on the sector. Engineered wood players will be affected by (1) particleboard price war and (2) higher cost environment (higher oil price YoY). On the other side, furniture players will be benefitted by (1) lower cost environment (particleboard and MDF) and (2) possible higher sales as a result of US-China trade war. We opine that the minimum wage hike will have minimal impact to the industry as margin will be cushioned by stronger USD against Ringgit.
The big misconception. Not all wood-based manufacturers are benefitting from the weakness in Ringgit (in particular, the engineered wood producers). This is due to (i) intensifying competition from major players in the Asian region and (ii) weaker currencies among the major engineered wood consuming nations (especially Middle East and China). Furniture players, on the other hand, will be the major beneficiaries of weaker a Ringgit given their exposure to the US market. Besides, we note that furniture players are also benefitting from the lower engineered wood product prices (which account for ~20-25 of their production cost).
No sign of improvement, particleboard oversupply issue still lingers. Overcapacity of particleboard in the region has resulted in selling prices declining since 3Q17 and we believe selling prices of engineered wood products will remain depressed (if not weakening further), as some of the new capacities have yet to come on board and demand weakness remains (Figure #2). We believe E2 board price has plunged to around RM450-500/cm3 from around RM550-600/cm3 early 2017.
Price war impact to HeveaBoard will be less severe. While both Evergreen and Heveaboard will be hit by the weak demand and price prospects of engineered products, we believe the impact to the latter will be less severe, thanks to its ready-to assemble (RTA) furniture segment (which accounts for 60% of its total revenue), which demand remains resilient and is benefitting from lower particleboard prices.
Clouds are clearing for the furniture boys. We expect topline and margin to recover from this point onwards, thanks to higher USD against ringgit and lower material prices (particleboard & MDF). On top of that, furniture makers may gain from the trade war as the latest list imposed includes furniture. According to our channel checks, furniture makers in Malaysia had been aggressively receiving new enquiries from US companies.
Forecast. We adjusted higher USD against Ringgit from RM3.9/USD to RM4.0/USD for FY18 and RM4.1/USD for FY19/20 for all the counters. With that, we raise our FY18-20 earnings forecast for Lii Hen by 19-27% respectively. We upgrade to BUY from HOLD with a higher TP RM3.33 (previously RM2.62) based on 10x FY19 revised EPS of 33.3sen. Besides that, we cut our FY18-20 earnings forecast for HeveaBoard slightly by 1-2% respectively, mainly to account for (1) lower particleboard ASP, (2) higher glue cost. We maintain HOLD with a lower TP RM0.83 (previously RM0.85) as we pegged it to a lower P/B multiple of 1.1x (5 years average). Similarly, we also cut our FY18-20 earnings forecast for Evergreen by 27.5-44.2% respectively, as we adjusted higher cost. We change our valuation methodology from P/E ratio to P/B ratio of 0.33X (-1 SD of 5 years average PB ratio). Maintain HOLD with a slightly higher TP RM0.43(previously RM0.42). Lastly, we keep our forecast unchanged for Homeritz, Maintain BUY With Unchanged TP 0.84.
Maintain Neutral. In view of as we opine that the USD strengthened against Ringgit, may only partially cushion the higher cost environment. In addition, the ongoing price war on engineered wood products is not expected to recover in the near term.
Source: Hong Leong Investment Bank Research - 15 Nov 2018