We continue to see near term headwinds to Hevea’s earnings recovery path, as positive demand outlook (witnessed by its healthy order book of 2-4 months) and stabilised raw material prices will be hampered by output disruption arising from the FMCO and persistent labour shortfall. We lower our FY21 forecast by -46.3% to account for 4 weeks loss of annual capacity due to FMCO. Maintain HOLD with a lower TP of RM0.58 from RM0.65 pegged to a lower P/B of 0.8x from 0.9x based on FY21 BVPS. Despite having anticipated challenging near term prospects, we believe downside to Hevea’s share price will be cushioned by its healthy balance sheet of net cash RM38m (or NCPS of 6.7 sen).

We Met With Hevea With the Following Key Takeaways:

RTA segment. Despite seeing a strong demand for its RTA products, Hevea is having difficulty in scaling up its production due to prolonged labour shortage (as a result of border closure, which restricted the employment of foreign labour). In view of labour shortfall (which will likely remain for a while), Hevea has reshuffled its RTA production lines, in an attempt to improve its production efficiency further.

Particleboard segment. The particleboards segment is currently running at ~85% utilisation rate with production lead time of ~45 days. We understand that Hevea is still progressively raising its selling prices to withstand high raw material costs (which seem to have stabilised, at least for now). Currently, ~30% of particleboards are supplied to the group’s RTA segment, while the remaining ~70% are exported.

ESG initiatives. The group had recently acquired a 33% stake in Satria Megajuta (“SMSB”), a solar PV investment company (Figure #1). Through SMSB, a 1.48MW solar PV system was successfully installed on the rooftop of its RTA factories. In addition to a reduction in electricity costs, a portion of the RTA furniture will also be produced with green energy. On the “social” front, Hevea has invested over RM500k in FY20 to upgrade its workers’ hostel. Besides that, the group has also been proactive in its measures to prevent the spread of Covid-19 through voluntary screening of its employees. The Covid-19 cases detected back in Feb this year was a result of the second voluntary screening exercise carried out by the group.

Outlook and challenges. We continue to see near term headwinds to Hevea’s earnings recovery path, as positive demand outlook (witnessed by its healthy order book of 2-4 months) and stabilised raw material prices will be hampered by output disruption arising from the FMCO (cant’ operate as deemed “non essential”) and persistent labour shortfall. Besides, further extension of plant closure (should FMCO extend further) will thwart its earnings recovery.

Forecast. We lower our FY21 forecast by -46.3% (high operating leverage due to fixed cost) to account for the 4 weeks loss of annual capacity due to FMCO.

Maintain HOLD, TP: RM0.58. Given the bumpy recovery road ahead, we lower our P/B multiple from 0.9x to 0.8x (roughly -0.6SD below 5 year mean) to err on the side of caution. Our TP decreases to RM0.58 from RM0.65 based on FY21 BVPS. Despite having anticipated challenging near term prospects, we believe downside to Hevea’s share price will be cushioned by its healthy balance sheet with net cash RM38m (or NCPS of 6.7 sen).

Source: Hong Leong Investment Bank Research - 14 Jun 2021