3Q21 core net loss of -RM3.4m brought 9M21’s sum to -RM9m. We deem this to be in line with our full year loss forecast of -RM2.3m as we expect the group to turnaround in the following quarter. We anticipate an earnings recovery in 4Q21 as the 4th quarter is a seasonally stronger quarter for Hevea due to increased orders from its largest market Japan in preparation for the Japanese New Year. Maintain HOLD with an unchanged TP of RM0.43 pegged to P/B multiple of 0.6x based on FY22 BVPS of RM0.72.

In line. 3Q21 core net loss of -RM3.4m (2Q21: -RM3.7m; 3Q20: RM8.1m) brought 9M21’s sum to -RM9m (9M20: RM6.1m). We deem this to be in line with our full year loss forecast of -RM2.3m as we expect the group to turnaround in the following quarter. Our 9M21 core net loss figure was arrived at after adjusting for foreign exchange gain of RM0.5m.

Dividend. None (3Q20: 1 sen). 9M21: None (9M20: 1 sen).

QoQ. Revenue declined -27.2% due to a longer period of factory closure (particle boards segment resumed operations partially in July while RTA resumed operations since end-Aug) and supply chain disruptions which impacted production capacity. Despite the decline in revenue, core net loss narrowed marginally to -RM3.4m (from -RM3.7m) due to lower operating expenses.

YoY. Revenue declined -41.2% due to the same reasons as mentioned in the QoQ paragraph above. Consequently, the group recorded core net loss of -RM3.4m (from RM8.1m) due to lower sales, higher raw material cost and lower production efficiency achieved. .

YTD. Revenue declined -3.5% due mainly to the decline in its RTA segment (-12.3%) which was closed for almost 3 months (vs. c.2 months SPLY) while partially offset by its particleboard segment (+12.8%) which was closed for a shorter period vs SPLY. In turn, the group recorded core net loss of -RM9m (from RM6.1m) due to the decline in revenue coupled with higher raw material costs.

Outlook. We understand that supply chain issues have improved in 4Q21. As such, Hevea should be able to increase its production output level. We anticipate an earnings recovery in 4Q21 as the 4th quarter is a seasonally stronger quarter for Hevea due to increased orders from its largest market Japan in preparation for the Japanese New Year. Nonetheless, Hevea’s profit margin may continue to come under pressure as glue cost remains very high and volatile due mainly to the increase in urea price as demand for oil palm fertilizers increases; while rubber wood cost may also increase towards year end due to the rainy season.

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 the robust demand from the Japan market, the elevated raw material cost will continue to exert pressure on its profit margin in the near term.

Source: Hong Leong Investment Bank Research - 26 Nov 2021