by NUR HAZIQAH A MALEK / pic credit: ANNUAL REPORT
WOOD-BASED manufacturers’ earnings are expected to improve, but risks linger with the Full Movement Control Order (FMCO) and potential extension.
Hong Leong Investment Bank Bhd analyst Gan Huan Wen expects companies such as HeveaBoard Bhd and Evergreen Fibreboard Bhd will experience earnings recovery supported by a healthy orderbook for at least two months.
The investment bank noted that near-term headwinds to HeveaBoard’s earnings recovery path — as positive demand outlook, which is witnessed by its healthy orderbook of two to four months and stabilised raw material prices — will be hampered by output disruption arising from the FMCO.
“Further extension of plant closure, should the FMCO extend further, will thwart its earnings recovery,” he wrote in a research report recently.
Despite strong demand for its ready-to-assemble (RTA) products, HeveaBoard is having difficulty to scale up its production due to prolonged labour shortage as a result of border closure.
Gan noted that Heveaboard has reshuffled its RTA production lines to improve production efficiency, while HeveaBoard’s particleboards segment is currently running at 85% utilisation rate with production lead time of around 45 days.
“We understand that HeveaBoard is still progressively raising its selling prices to withstand high raw material costs which seem to have stabilised, at least for now.
“Currently, 30% of particleboards are supplied to the group’s RTA segment, while the remaining 70% are exported,” he stated.
Gan maintained a ‘Hold’ call for HeveaBoard due to the bumpy recovery ahead and lowered its target price (TP) to 58 sen from 85 sen previously.
“Despite challenging near-term prospects, we believe downside to HeveaBoard’s share price will be cushioned by its healthy balance sheet with net cash of RM38 million,” he said.
“Evergreen’s earnings would be supported by an orderbook with two to nine months’ visibility and average selling price (ASP) that gain strength from strong demand from local furniture makers and the US.”
Besides FMCO extension, increasing raw material price, raw material supply disruption and limited shipping availability are key risks.
The group mitigates these risks by supplying more to the local market, he noted.
Evergreen’s top-line contributors are 60% from medium density fibreboard (MDF), particleboards (20%), and RTA and value-added boards (20%).
Gan said Evergreen’s RTA segment sees a demand surge mainly from the US, a new market with low penetration previously.
“The utilisation rate for the RTA segment is currently at close to 100% with strong order visibility.
“The group has put on hold major plans for expansion due to labour shortage,” he said.
The company’s MDF segment is currently seeing a recovery in demand and ASP, driven by the demand increase from Muar, Johor-based furniture makers.
Gan noted that there is an increase in furniture orders from the US, while the increase in demand from the Middle East is due to panic buying from customers who are concerned about shipping constraints arising from the global container shortages.
“The utilisation rate for the MDF segment is currently close to 100% with order visibility longer than previously.
“The particleboards segment of the group similarly enjoys an increase in demand from the local furniture makers in Malaysia, while the utilisation rate for this segment is currently at close to 100% with commendable order visibility,” Gan said.
He maintained a ‘Buy’ rating for Evergreen with a lowered TP to 67 sen from 68 sen.