Heng Huat: Shareholders Surely Heng & Huat?

Heng Huat Resources will be listed in ACE market tomorrow on 25th July 2014 with an IPO price of 45sen per share. Its IPO was oversubscribed by 60.3x by the public!

Heng Huat is a relatively new company established in 2007. Its main business involves:

• Manufacturing and trading of coconut biomass materials
• Manufacturing & trading of oil palm biomass materials
• Manufacturing & marketing of mattresses & related products (Fibre Star brand)

The Penang-based company started with 2 production lines for manufacturing of coconut fiber & coconut peat back in 2007. It then expanded its reach to include oil palm empty fruits bunch (EFB) fiber which has better economy of scale in 2009, and later went downstream into fiber mattress business in 2011.

So Heng Huat can be considered as a "green" company which makes waste products (coconut & EFB fibers) to good use.

Besides mattress, these fibers can be used to make upholstered furniture, cushion, carpet, mat, broom, paper, fertilizer etc, as well as being used as erosion control mat, green fuel and farming materials.

Heng Huat mainly exports its oil palm EFB related products to China, which makes up 59.13%, 62.88% and 55.22% from FY11 to FY13. It has a major customer in China (Shenzhen Yuemao) who accounted for 30.14% of FY13's total revenue.

How is Heng Huat's past financial performance?

RM mil	FY13	FY12	FY11
Revenue	73.7	63.0	31.7
Gross profit	32.0	30.6	17.6
PBT	11.4	13.6	13.7
PATAMI	9.7	12.2	10.5

FY ends 31 Dec

It is an extremely positive sign that its revenue grows for the last 3 years. However, PBT & PATAMI drops quite significantly in FY13, mainly due to higher selling & distribution expenses, finance cost & tax.

Though gross margin drops throughout the years, it is still a good 43.4% in FY13.

Heng Huat has just released its FY14Q1 results.

RM mil	FY14Q1	FY13Q1
Revenue	21.3	16.1
Gross profit	9.7	7.7
PBT	3.8	3.0
PATAMI	3.0	2.6

Revenue & PATAMI rise 32% & 15% respectively YoY, while gross margin manage to stay at 45.5%. This is definitely a great result which can charge its share price up when trading starts on 25th July.

As at 31 Mac 2014, Heng Huat has RM6.3mil of cash, RM36.7mil borrowings & RM40.4mil shareholders equity. This makes its net gearing at 0.75x which is high.

It has accumulated debts due to acquisition of production land/plants and expansion of its production lines for the past 2 years.

So the IPO which will raise RM20.93mil cash comes timely. As much as 45% of the IPO cash will be used to repay the borrowings. The net gearing is expected to ease to 0.3x.

Heng Huat offers 46.5mil shares to the public at 45sen each. Its enlarged paid up shares will be 205.8mil when listed in ACE.

Is the IPO price attractive?

Heng Huat's net asset per share stands at 25sen according to latest FY14Q1 report, and it is expected to reach 27sen after IPO. The price/book ratio is 1.7.

With its FY13 PATAMI of RM9.7mil, EPS (post IPO) should be 4.7sen, and PE ratio at 45sen per share is 9.6x. 

If we annualize its FY14Q1 result, FY14 might give a PATAMI of RM12mil and thus EPS 5.8sen. With this, its forward PE ratio for FY14 is just 7.8x at share price of 45sen.

I think IPO at 45sen is a good price for investors. For those who still do not own the shares, can they still get it at 45sen when it starts trading? I doubt so.

In its notes in latest FY14Q1 quarterly result, Heng Huat mentions that there is recent banning of new coal-fired plants in Beijing, Shanghai & Guangzhou which are China's largest cities.

So Heng Huat who has more than half of its business in China might benefit from anticipated higher demand for alternative greener fuel source such as palm briquette.

       Palm Briquette

Palm Briquette is an Ideal Green Fuel due to

• Eco friendly and Renewable Energy Fuel.
• Economical and Cheaper than other solid fuels ie. Coal and Wood.
• Higher Thermal calorific value around 4000 Kcal/Kg.
• Pollution free because there is no sulphur or any hazardous materials.
• Lower ash content 2 to 5%. There is no fly ash when burnt.
• Consistent high burning efficiency due to the low moisture.
• Contain High Density and Higher Fix Carbon Value.
• Easy for Transportation, feeding & combustion due to unique shape.
• Combustion is more uniform compared to other fuels.
• Good Market due to rise in price of Fossil Fuels.

Perhaps Heng Huat can just forget about the mattress and concentrate on its core business.