2Q21 core net loss of -RM3.7m (1Q21: -RM1.8m; 2Q20: -RM3.3m) brought 1H21’s sum to -RM5.6m (1H20: -RM2.0m), which came in below our full year core net profit forecast of RM7.1m. The results shortfall was due to higher than expected raw material cost and operating expenses. We lower our FY21/22/23 earnings forecasts to -RM2.3m/ RM16.4/ RM20.3m from RM7.1m/ RM17.8m/ RM22.4m. Maintain HOLD with a lower TP of RM0.43 (from RM0.51) pegged to a lower PB multiple of 0.6x (from 0.7x) based on FY22 BVPS of RM0.72. While we expect Hevea to return to profitability in 4Q21 supported by its healthy order book, the elevated raw material cost will continue to exert pressure on its profit margin in the near term.

Below expectation. 2Q21 core net loss of -RM3.7m (1Q21: -RM1.8m; 2Q20: - RM3.3m) brought 1H21’s sum to -RM5.6m (1H20: -RM2.0m), which came in below our full year core net profit forecast of RM7.1m. The results shortfall was due to higher than expected raw material cost and operating expenses. 1H21’s core net loss was arrived at after adjusting for foreign exchange gain of RM0.8m.

Dividend. None (2Q20: 0.5 sen per share). 1H21: 0.75 sen per share (1H20: 1.5 sen per share).

QoQ. Revenue declined by -10.7% was due to lower sales volume as a result of factory closure during Phase 1. In line with the decline in revenue, core net loss widened to -RM3.7m (vs -RM1.8m in 1Q21).

YoY. Revenue increased by 44.7% due to higher sales volume and ASP. Although Hevea had a similar down time SPLY due to MCO1.0, there were supply disruption issues when it restarted operations last year resulting in lower sales volume. Despite the increase in revenue, core net loss widened to -RM3.7m (vs -RM3.3m SPLY) due to higher raw material cost, operating and tax expenses.

YTD. Revenue increased by 23.7% but core net loss widened to -RM5.6m (vs - RM2.0m SPLY) due to the same reasons as mentioned in the YoY section.

Outlook. We understand that Hevea’s particle boards segment had resumed operations partially in July while its RTA segment resumed operations at end-Aug. Both segments faced supply shortage issue initially when it started its operations. While we expect 3Q21 to be another weak quarter due to the production down time during the quarter as a result of Phase 1 restrictions, we anticipate an earnings recovery in 4Q21 supported by a healthy order book as well as a seasonally stronger quarter due to increased orders from Japan in preparation for the Japanese New Year. Nonetheless, we expect the current high rubber wood and glue costs will continue to exert pressure on the group’s profit margin.

Forecast. We lower our FY21/22/23 earnings forecasts to -RM2.3m/ RM16.4/ RM20.3m from RM7.1m/ RM17.8m/ RM22.4m to account for higher raw material cost assumptions.

Maintain HOLD, TP: RM0.43. We lower our P/B multiple on Hevea from 0.7x to 0.6x as we are taking a more cautious stance on its earnings prospects (given its weaker pricing power relative to its peers under rising cost pressure). Consequently, our TP lowers to RM0.43 (from RM0.51 previously) based on FY22 BVPS of RM0.72. While we expect Hevea to return to profitability in 4Q21 supported by its healthy order book, the elevated raw material cost will continue to exert pressure on its profit margin in the near term.

Source: Hong Leong Investment Bank Research - 30 Sept 2021