Hevea’s FY21 core net loss of -RM1.8m came in within our expectation. We increase our FY22/23 earnings forecasts by 63.4%/67.6% mainly to account for (i) stronger particleboards sales volume; and (ii) better boards product mix. Maintain BUY with an unchanged TP of RM0.63 pegged to P/B multiple of 0.85x based on FY22 BVPS of RM0.72. We are turning positive on Hevea mainly due to the increase in demand from the Japanese market for its particleboards and the group’s shift in focus to produce higher margin boards. In addition, the group has a healthy balance sheet with NCPS of 17 sen.

In line. Hevea reported 4Q21 core net profit of RM7.2m (3Q21: -RM3.4m; -25.7% YoY) which brought FY21’s sum to -RM1.8m (FY20: RM15.8m). The results were in line with our full year loss forecast of -RM2.3m. Our FY21 core net loss figure was arrived at after adjusting for foreign exchange gain of RM0.6m.

Dividend. None (4Q20: 0.5 sen). FY21: None (FY20: 2.3 sen). Hevea typically declares a final dividend, likely in April.

QoQ. Revenue increased by 77.4% contributed by particleboard (+37.8%) and RTA (+1.3x) as production has normalized in current quarter. We note that particleboards segment resumed operations partially in July while RTA resumed operations since end-Aug. Consequently, core net profit rebounded to RM7.2m from a core net loss of -RM3.4m.

YoY. Revenue declined by -6.8%, dragged by RTA (-19.7%) mainly due to the deferment of goods shipment as a result of containers shortage, while partially offset by particleboard (+19.5%) due to higher ASP from better product mix which more than offset the lower sales volume due to deferment of goods shipment. Consequently, core net profit decline by -25.7% due to the revenue decline coupled with higher raw material costs.

YTD. Revenue declined by -4.6%, dragged by RTA (-14.7%) mainly due to the lower production volume as a result of longer production shutdown period of 3 months (vs. c.2 months SPLY), while partially offset by particleboard (+14.9%) due to higher ASP from better product mix despite lower sales volume. In turn, the group recorded core net loss of -RM1.8m (from RM15.8m SPLY) as a result of decline in revenue coupled with higher raw material costs.

Outlook. Despite the elevated raw material cost and deferred shipment of goods, the group still managed to record commendable results in the quarter, a turnaround from the previous 3 quarters of losses. We believe the group has turned the corner and we have turned positive on the group due to (i) increase in demand from the Japanese market for its particleboards (revenue increased by +19.5% YoY in 4Q21); (ii) the group’s shift in focus to produce higher margin boards (PBT in particleboards segment increased by +7.1% YoY in 4Q21); (iii) the potential capacity increase in RTA from foreign labour intake; (iv) the encouraging RTA sales growth to e-commerce sellers; and (v) the scaling up in utilization rate for its fungi cultivation segment (the group plans to gradually scale the utilization rate from c.50% in 4Q21 to 100% in FY22). Furthermore, we expect the current elevated cost of rubber wood and glue to ease as weather condition improves and urea price stabilizes. We also expect Hevea to benefit under a declining raw material cost environment as Hevea typically does not adjust its selling price frequently, thus, resulting in margin expansion.

Forecast. We increase our FY22/23 earnings forecasts by 63.4%/67.6% mainly to account for (i) stronger particleboards sales volume; and (ii) better particleboards product mix.

Maintain BUY with an unchanged TP of RM0.63 pegged to P/B multiple of 0.85x based on FY22 BVPS of RM0.72. We are positive on the group’s prospects in FY22 supported by the reasons highlighted above. The group also has a favourable ESG profile due to its exposure in a sustainable industry and the positive initiatives the group has taken to improve its ESG characteristics. In addition, the group has a healthy balance sheet with net cash of RM95.8m or NCPS of 17 sen (35.3% of its market capitalization).

Source: Hong Leong Investment Bank Research - 25 Feb 2022