Hevea’s FY20 core net profit of RM15.8m came in within our expectation (100%). Declared DPS of 0.5 sen (going ex on 11 Mar 2021), bringing FY20 DPS to 1.5 sen (4Q19: 1 sen, FY19: 4 sen). We lower FY21/22 earnings forecasts by 16%/4.4% to account for (i) higher raw material and freight costs; (ii) weaker USD; and (iii) partial reversal of demand from WFH trend. We lower our P/B multiple from 1.1x to 0.9x (based on -0.5SD below 5-year historical P/B of 1.1x). Hence, our TP reduces from RM0.83 to RM0.66 based on FY21 BVPS. With its healthy balance sheet (net cash of RM42.1m or 7.4 sen per share), we opine that Hevea will be able to weather through these near term headwinds.

Finishing in line. Hevea reported 4Q20 core PATMI of RM9.7m (+19.4% QoQ, +32.7% YoY), bringing FY20’s sum to RM15.8m (+1.2% YoY). The latter accounted for 100% of our full year forecast (consensus: 113.7%), which is within ours but above consensus expectations. FY20 core PATMI was derived after removing foreign exchange loss of -RM0.3m.

Dividend. Declared DPS of 0.5 sen (ex-date: 11 Mar), bringing FY20 DPS to 1.5 sen (4Q19: 1 sen, FY19: 4 sen). Hevea typically declares a final dividend, likely in April.

QoQ. Revenue increased by 11.9% mainly lifted by higher particleboard ASP, while core PATMI increased by 19.4%.

YoY. Revenue was flattish (+1.8%) with higher revenue from RTA segment (+10.3%) offset by lower revenue from particleboard segment (-13%). Despite flattish revenue, core PATMI increased by 32.7% due to lower raw material cost for the particleboard segment.

YTD. Revenue decreased by -7.3%. Despite higher average particleboard ASP and higher average USD/MYR rate (+ 1.4%), this was offset by the lower sales volume from the production disruption during MCO. Nevertheless, core PATMI managed to come in flattish (+1.2%) due to lower raw material cost.

Outlook. Although Hevea continues to see strong demand across all segments, we are turning cautious on the group’s prospects due to (i) rising raw material and freight costs which will put pressure on the group’s already narrow profit margin; (ii) weakening USD rate (>80% of the group’s sales are exported); (iii) limited upside to capacity due to constraint of foreign labour intake; (iv) positive vaccine development and downward trending global Covid cases that may partially reverse the elevated demand due to WFH culture; and (v) the recent suspension of operations in the RTA segment from 20 Feb to 2 Mar 2021 due to Covid-19 cases detected among some of its employees. There is a risk that the factory closure period may be extended depending on advice from MOH.

Forecast. We lower our FY21/22 earnings forecasts by 16%/4.4% due to reasons highlighted above.

Downgrade to HOLD, TP: RM0.66. As we are turning cautious due to an increasingly challenging operating environment for Hevea, we lower our P/B multiple from 1.1x to 0.9x (at -0.5SD below 5-year historical P/B of 1.1x). Hence, our TP is lowered from RM0.83 to RM0.66 based on FY21 BVPS. With its healthy balance sheet (net cash of RM42.1m or 7.4 sen per share), we opine that Hevea will be able to weather through these near term headwinds.

Source: Hong Leong Investment Bank Research - 26 Feb 2021