Can Heng Huat Achieve RM15mil PATAMI In FY15?

Heng Huat FY15Q1 Financial Result

HHG (RM mil)	FY15Q1	FY14Q4	FY14Q3	FY14Q2	FY14Q1
Revenue	26.5	23.2	23.1	24.1	21.3
Gross Profit	10.6	8.8	10.4	10.4	9.7
Gross%	40.0	37.9	45.0	43.2	45.5
PBT	3.5	3.5	2.3	3.7	3.8
PBT%	13.2	15.1	9.9	15.2	17.6
PATAMI	2.9	3.4	1.2	2.7	3.0
Biomass Rev	19.9	18.1	18.6	19.7	16.7
Mattress Rev	12.6	9.8	9.1	9.2	9.1
Biomass OP	3.6	3.6	4.3	4.2	3.5
Mattress OP	0.3	-0.1	-0.1	-0.2	0.3
Total Equity	70.0	68.3	64.8	43.1	40.4
Total Assets	114.3	109.8	110.5	95.3	90.5
Trade Receivables	26.7	22.3	19.7	21.4	19.2
Inventories	4.8	5.9	6.3	5.4	4.6
Cash	14.1	15.2	18.8	2.6	2.4
Total Liabilities	39.9	36.8	42.2	49	47.4
Trade Payables	13.1	11.2	9.2	11.4	9.4
ST Borrowings	11.4	9.6	12.1	15.5	15.3
LT Borrowings	14.3	15.3	19.0	20.5	21.4
Net Cash Flow	-1.2	13.0	16.6	0.4	0.2
Operation	4.9	13.5	8.7	6.5	2.6
Investment	-4.3	-7.7	-7.5	-5.1	-1.8
Financing	-1.7	7.3	15.5	-1.1	-0.7
Dividend paid	1.0	0.0	0.0	0.0	0.0
EPS	1.42	1.67	0.64	1.69	1.91
NAS	0.34	0.38	0.38	0.27	0.25
D/E Ratio	0.17	0.14	0.19	0.77	0.85

Due to increase average selling price of its biomass materials & related products, Heng Huat's FY15Q1 revenue improves 24.4% compared to corresponding quarter of FY14Q1 last year.

However, because of higher raw material price as well, gross profit increases by only 9.3%. Gross profit margin reduces from 45.5% to 40.0% in the same period.

Compared QoQ to preceding quarter of FY14Q4, revenue increases 14.2% but PBT is flat mainly due to higher selling and admin cost (annual increment and higher bonus).

Quarterly revenue from both biomass & mattress divisions reach record high but operating profits stay flat. Revenue from mattress division actually shows a good growth of 28% QoQ.

HH not only sells those super hard mattress made from biomass fiber, it also sells spring mattress. So it might benefit from accelerated completion of new properties in the country.

Other than that, balance sheet and cash flow remain fairly healthy.

       Fibre Star Pocket Spring Mattress

HH has paid its first ever interim dividend of 0.5sen (RM1.03mil) for its FY15 earlier this year. There is no dividend for FY14. There might be another round of dividend for FY15.

Its share price has rallied from 50sen to above 70sen level since the start of Apr15. I actually do not expect it to climb so fast.

The surge in share price was fueled by an article in The Edge on 27 Apr in which Heng Huat's executive director "hinted" that the company can achieve revenue and net profit of RM100mil (+10%) and RM15mil (+20%) respectively in its FY15.

So, latest Q1 PATAMI of RM2.9mil must have disappointed many investors and speculators thus its share price drops significantly.

Besides, Heng Huat also proposed bonus issue of 1:2 and transfer to main board as expected. These proposals have been submitted to Bursa Malaysia for approval.

Is it a trend now to give bonus issues soon after listing?

       "We got annual salary increment and higher bonus. How about you?"

Export sales make up 65-70% of HH's sales and China alone takes up 45%. Other countries are South Korea, Australia etc.

Director mentioned that strengthening of China RMB against RM will benefit HH. Its Forex gain in Q1 is just RM161,000.

Low crude oil price and slow down in China's growth could be concerns to HH. It's good that HH can explore new markets esp in Europe.

Using the company's forecast RM15mil PATAMI as a guide, target FY15 EPS for HH will be 72.9sen. So my target price will be 73sen base on PE ratio 10x.