2Q20 core loss after tax of -RM3.3m (vs. core PAT of RM1.3m in 1Q20 and RM0.9m in 2Q19) brought the 1H20 sum to -RM2.0m. We deem this in line, as we expect a stronger 2H due to seasonality coupled with absence of MCO. Forecasts remain unchanged. With production disruptions behind them and better RTA sales volumes expected, we expect Hevea to return to profitability in 3Q20. The import ban on particleboards and fibreboards should a lso translate to ASP recovery. As such, we raise our P/B multiple from 0.4x to 0.5x (based on -0.5SD below 2-year historical P/B of 0.6x). Hence, our TP rises from RM0.33 to RM0.40. Upgrade from Sell to HOLD.

In line. 2Q20 core loss after tax of -RM3.3m (vs. core PAT of RM1.3m in 1Q20 and RM0.9m in 2Q19) brought the 1H20 sum to -RM2.0m. We deem this in line, as we expect a stronger 2H due to seasonality coupled with absence of MCO; 4Q is typically a strong quarter for Hevea due to increased sales orders in the RTA division associated with Japanese New Year. Note that in 4Q19, core net profit of RM9.4m accounted for ~60% of Hevea’s FY19 total core net profit. Our core loss after tax figure was arrived at after adjusting for foreign exchange loss of RM0.6m.

Dividend. DPS of 0.5 declared, going ex on 9 Sep 2020 (2Q19: 1 sen per share). 1H19: 1 sen per share (1H20: 0.5 sen per share)

QoQ. Revenue shrank 32.4% mainly due to seasonality as well as production disruptions from MCO restrictions, which have in turn resulted in lower sales at the RTA division. Note that 4Q and 1Q are seasonally strong quarters for the RTA division due to increased orders from Japan associated with Japanese New Year. Hevea recorded core loss after tax of -RM3.3m (from core net profit of RM1.3m) due to seasonality in the RTA division, as well as losses in the particleboard segment due to operational disruptions and difficulty procuring raw materials during MCO period.

YoY. Sales decline (-34.1%) in both particleboard (-32.2%) and RTA (-35.8%) were due to lower order volumes from overall market turmoil and production disruptions from MCO restrictions. Core loss after tax of -RM3.3m (from core net profit of RM0.9m) was due to lower sales coupled with higher unit fixed cost (arising from lower production volume).

YTD. Sales decline (-23.2%) and core loss after tax of -RM3.3m (from core net profit of RM3.0m) was due to similar reasons mentioned in YoY section.

Outlook. With the resumption of full capacity production and reported encouraging RTA sales volumes from June onwards, we expect Hevea to return to profitability in 3Q20. While still small, we expect the fungi cultivation division to continue to face teething issues in the production process and therefore, post losses for the time being. With recent Federal gazette banning the importation of particleboards and fibreboards (effective mid-Oct), Hevea stands to benefit from better ASPs resulting from improved local demand. We note that currently, many furniture makers purchase boards from both local and foreign sources.

Forecast. Unchanged.

Upgrade to HOLD, TP: RM0.40. With production disruptions behind them and better RTA sales volumes expected, we expect Hevea to return to profitability in 3Q20. The import ban on particleboards and fibreboards should also translate to ASP recovery. As such, we raise our P/B multiple from 0.4x to 0.5x (based on -0.5SD below 2-year historical P/B of 0.6x). Hence, our TP rises from RM0.33 to RM0.40. Upgrade from Sell to HOLD

Source: Hong Leong Investment Bank Research - 25 Aug 2020