PETALING JAYA: Companies listed in Bursa Malaysia that produce panels are expected to make strong profits in 2022 thanks to a bull cycle in the wood manufacturing sector.
The ongoing Russian-Ukrainian conflict, which has led Russia to ban the export of timber and forest products to the West, could see buyers sourcing from alternative suppliers in countries in this part of the region such as Vietnam, Indonesia and Malaysia, according to Hong Leong Research Investment Bank (HLIB).
The research firm said recent trade disputes bode well for local industry players amid strong demand for furniture and wood-based products from countries like the United States.
“The US-China and US-Canada trade wars as well as the Russian-Ukrainian conflict have exacerbated global supply and demand imbalances. To recap, China, Canada and Russia were ranked among the top five exporters of wood products in the world in 2019,” he said in a report yesterday.
He pointed out that the US market share of wood products imported from China dropped dramatically from 31% to 12.3% in just two years after the US-China trade war started in 2018. US housing market is one of the top importers of plywood, veneer panels and laminated wood sim in 2020, accounting for 17% market share.
Another bode well for local panelboard players is that raw material costs, which had increased due to supply disruptions and labor shortages, are coming down from the peak, according to the research house.
However, manufacturers were able to offset higher raw material prices with higher average selling prices (ASPs) for wood products due to strong demand.
Adhesive prices, which account for 20% to 30% of the cost of medium-density fiberboard (MDF) and plywood, peaked in January and continued to decline amid falling urea prices and a decline in the Global Supply Chain Pressures Index, the research firm said.
“With costs falling but ASPs holding firm, this could significantly boost the bottom line for panel producers during this boom cycle, as evidenced by recent earnings from companies under our coverage, such as Heveaboard Bhd.Evergreen Fibreboard Bhd and Focus Lumber Bhd..
“Overall, we believe the strong panel player earnings are here to stay, at least for 2022.
“We tactically prefer companies producing panels as they are seen as the main beneficiaries of the rising commodity cycle.
“When it comes to furniture players, we continue to love Lii Hen Industries Bhd and Homer Corp Bhd, given their attractive valuation, coupled with a dividend yield of over 5%,” the research firm added.
The research firm said Evergreen’s stock price “still has more steps to go as the current rally has likely not yet fully priced in its potential upside in earnings ahead” as the company looked set to benefit from post-pandemic trends in hybrid working and furniture buying. online, which made lightweight or flat-packed furniture popular.
Meanwhile, he finds the valuation of Focus Lumber, at an earnings price (PE) of 6.3x and 5.6x for FY22-FY23, undemanding and worth reassessing given the tailwinds.
In the case of HeveaBoard, he said the stock’s risk-reward profile is becoming more attractive now after falling 32.4% from 74 sen at the 52-week high to 50 sen as of March 30.
This is supported by undemanding valuations of 8.3 times estimated FY23 PE and 0.66 times book price, as well as supported by a 29% compound annual growth rate in earnings per share of exercise 20 to exercise 23.
The group also has a favorable environmental, social and governance profile due to its exposure in a sustainable industry, he added.