Challenging outlook persists for Heng Huat
KUCHING: Challenging times persist for Heng Huat Resources Bhd ( Heng Huat) following poor results in financial year 2016 ( FY16) on the back of lower contributions from its fibre products segment.
The research wing of Kenanga Investment Bank Bhd ( Kenanga Research) observed that Heng Huat’s core net profit in FY16 dipped 99 per cent to RM0.04 million on the back of lower revenue contribut ion from biomass ( bibre products) segment coupled with weaker prof it before tax ( PBT) margins due to lower volume and average selling prices (ASPs) for biomass products as demand from China weakened.
“A majority of Heng Huat’s manufactured oil palm EFB fibre is exported to China (circa 90 per cent) and their China clients are predominantly involved in the furniture industry.
“Hence, we bel ieve the dwindling demand for oil palm fibre in China is due to weaker demand for furniture in China underpinned by the slowdown in residential developments,” explained Kenanga Research in a note yesterday.
“On the f lip side, we note that Heng HUat purchases raw materials in ringgit but sells to China clients in US dollar or renminbi. Hence, the group could gain from the strengthening of US dollar against the ringgit.”
From 2Q17 onwards, Heng Huat’ss new plant in Gua Musang intended for oil palm EFB fibre manufacturing is expected to be operational. However, Kenanga Research was lukewarm on the additional 35,000MT capacity given the weaker demand from China since 2H15.
“Considering that about 90 per cent of oil palm EFB fibre is exported towards the China market, we foresee utilisation rate for new plant to remain low. In addition, we expect depreciation expenses to increase by about 20 per cent in FY17 from the commencement of their new plant.
“Balance sheet wise, Heng Huat’s net gearing has also increased to relatively high level of 0.58 times in FY16.”
Meanwhi le, Heng Huat ’ s mattress division – which does OEM and OBM manufacturing – has been suf fering losses in FY14 and FY15 and was barely profitable in FY16 – only registering PBT of RM0.47 million on the back of RM24 million revenue.
“We believe its OBM mattress division is plagued by intense competition against more wellknown brands, coupled with the rising raw materials cost for mattresses such as steel spring and rubber.
“We believe their profitability for mattress division in FY17w ould continue to be subdued.”
This Kenanga Research to project core net profits of RM3 million to RM3.4 million for FY17 and FY18E, based on utilisation rates of 68 to 70 per cent for Heng Huat’s total capacity, including their newly installed capacity.
“We are closing our previous position for Heng Huat with a ‘ not rated’ call at a fair value of RM0.32 per share.”