3Q20 core net profit of RM8.1m (vs. losses after tax of -RM3.3m in 2Q20, YoY: +151.5%) brought the 9M20 sum to RM6.1m. This accounted for 64.9% of our forecasts. We deem the results above expectations, as 4Q is typically a strong quarter for Hevea due to increased sales orders in the RTA division associated with Japanese New Year. We raise our FY20/21/22 earnings forecasts by 27.4%/14.1%/7.2% to account for stronger RTA sales going forward. We raise our P/B multiple from 0.6x to 1.1x (pegged to 5-year mean). After valuation adjustment, our TP rises from RM0.48 to RM0.83.

Above expectations. 3Q20 core net profit of RM8.1m (vs. core net loss of -RM3.3m in 2Q20, YoY: +151.5%) brought the 9M20 sum to RM6.1m. This accounted for 64.9% of our forecasts. We deem the results above expectations, as 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 FY18/19, 4Q accounted for ~50% of full year earnings . Our core earnings figure was arrived at after adjusting for foreign exchange loss of RM0.5m.

Dividend. DPS of 0.5 declared, going ex on 21 Dec 2020. (9M20: 1 sen per share) 3Q19: 1 sen per share. (9M19: 2 sen per share).

QoQ. Strong rebound in revenue (+79.2%) was due to relaxation of MCO restrictions on production operations. Hevea returned to profitability, reporting RM8.1m core net profit (vs. core net loss of –RM3.3m in 2Q20) for the same reason.

YoY. Better sales (+14.0%) were mainly driven by better RTA sales due to increased demand from consumers buying furniture due to on-going WFH arrangements. Coupled with better particleboard margins from lower raw material cost, core net profit rose by 151.5%.

YTD. Despite weaker particleboard sales (-18.2%) from MCO restriction on operations , particleboard PBT rose by 31.6% due to favourable USD/MYR exchange rate and lower average raw material cost. Weaker RTA sales (-7.4%) and PBT contribution (-35.8%) was due to MCO restrictions. All in all, core net profit declined -2.4% in tandem with lower sales of -11.0%.

Outlook. We expect Hevea to post strong earnings in 4Q20 particularly in the RTA division. This is due to on-going WFH arrangements due to the Covid-19 pandemic causing consumers to purchase new furniture as well as increased orders to Japan in preparation for Japanese New Year. Note that due to Japanese New Year, Hevea’s RTA furniture profitability peaks in 4Q.

Forecast. We raise our FY20/21/22 earnings forecasts by 27.4%/14.1%/7.2% to account for stronger RTA sales going forward.

Upgrade to BUY, TP: RM0.83. With production disruptions behind them and better RTA sales volumes expected from the WFH trend as well as Japanese New Year coming up, we expect Hevea’s profitability to pick up going forward. As such, we raise our P/B multiple from 0.6x to 1.1x (pegged to 5-year mean). After valuation adjustment, our TP rises from RM0.48 to RM0.83.

Source: Hong Leong Investment Bank Research - 26 Nov 2020