We continue to see near term headwinds for Hevea as positive demand outlook (witnessed by its healthy order book of 3-4 months) will be hampered by rising and volatile raw material costs as well as persistent labour shortfall. Nonetheless, we commend the group’s ongoing efforts to automate its production processes which will improve its operational efficiency, reduce operating cost as well as its reliance on labour. Maintain HOLD with TP of RM0.43 pegged to P/B multiple of 0.6x based on FY22 BVPS of RM0.72.

We Met With Hevea With the Following Key Takeaways:

RTA segment. RTA segment was closed since 1 June and was only allowed to operate towards end of Aug (i.e. only 1 month operating in 3Q21). In Sep, it was only able to achieve c.70% of normal output level as it was facing supply disruption issues for certain parts of the raw material components.

Particleboard segment. In July and Aug, the particleboard segment was only able to run at a limited capacity utilisation due to rubber wood supply disruption as saw mill was not operating during the period. To circumvent the situation, Hevea sourced its rubber wood directly from the plantation (which costs c. 30% higher vis-à-vis rubber wood purchased from saw mill (as Hevea had to purchase the whole rubber wood tree from the plantation vs. only offcuts and slabs from sawmill). Hevea guided that it was able to passed on most of this higher cost to customers as (1) it is selling to its regular customers that allowed it to fetch higher ASPs; and (2) Hevea was selective by only selling higher margin particleboards. The rubber wood supply from sawmill normalized in Sept, thus bringing down the average rubber wood cost for Hevea from Sept onwards. Resin cost on the other hand has been highly volatile since Sept due to (1) rising crude oil price; (2) freight cost increase; and (3) power outage in China (which caused resin price and supply from China to be highly unstable). Note that Hevea sourced its resin from a mix of local and China suppliers.

Fungi cultivation segment. Sales declined in 2Q21 and 3Q21 mainly impacted by the lower sales to restaurants as dine-ins at restaurants were not allowed during NRP Phase 1. We understand that sales to both restaurants and hypermarkets started picking up since Sept as lockdown restrictions eased. Current capacity utilisation for this segment is at 30-40%, with plenty of spare capacity to scale up supply once the demand on this segment pick up. As Hevea had resolved most of the teething issues from this segment, we expect that this segment should start contributing positively to its bottom line in FY22. We believe the sales growth for this segment will be supported by the group’s ongoing marketing efforts as well as the market growing appetite for healthy food options.

Outlook. We continue to see near term headwinds for Hevea as positive demand outlook (witnessed by its healthy order book of 3-4 months) will be hampered by rising and volatile raw material costs as well as persistent labour shortfall (number of labours were down c.14% from pre-Covid levels). Nonetheless, we commend the group’s ongoing efforts to automate its production processes which will improve its operational efficiency, reduce operating cost as well as its reliance on labour.

Forecast. Unchanged.

Maintain HOLD, TP: RM0.43 pegged to P/B multiple of 0.6x 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 - 12 Oct 2021