Despite a stoppage in operations of the particleboard factory in Jan, we believe that the earnings impact from this will be partially mitigated by the shipment of deferred finished goods from previous quarter as well as the strong sales volume in its RTA segment. As raw material supply has returned to a healthy level, we anticipate that Hevea should see sequential improvement from 2Q onwards. This improvement is further bolstered by the increasing particleboard sales export to the Japanese market that fetch a better margin compared to other export markets. 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 Hosted a Virtual Meeting With Management Recently With the Following Key Takeaways:

Hiccup in particleboard segment. As a result of low raw material inventory (due to tightness in log supply) and the build-up of finished goods in the warehouse (due to congestion at Port Klang), Hevea decided to temporarily halt its operations in Jan to clear the finished goods in the warehouse and rebuild its raw material inventory. Hevea took the opportunity during the down time period to perform its 2-week annual maintenance. The factory resumed its operations in Feb and raw material supply is back to a healthy level by Mar.

Strong sales in RTA segment. The RTA segment on the other hand, did not experience any disruptions and was running at full force to cater to the increased sales volume to the Japanese market as Japanese buyers stock up in preparation for the Japanese fiscal new year which starts on 1 Apr. It is a common tradition for Japanese students who are living on their own for the first time, as well as workers changing jobs during this period to purchase new study/work furniture (study desks, cabinets etc.) for the new year. Management also shared that they have submitted applications to bring in foreign workers mainly to its RTA segment. With authorities in the midst of relaxing intake of foreign workers as well as the opening of Malaysia’s borders on 1 Apr, the worker intake will enhance the capacity of its RTA segment significantly. Nonetheless, Hevea is still making continuous improvement in its production processes to mitigate labour shortage risk. As such, it will be spending RM10m capex to automate more processes. In addition, Hevea is also spending another RM20m to construct a new hostel that will be in full compliance to the Housing Act with a capacity of 1.5k workers for its RTA segment.

Increasing market share in Japan for particleboards. Management shared that the particleboard’s sales volume to Japan has increased significantly since 2H21 and the Japanese market is now one of its major export markets. This increase is a result of Japanese buyers diverting their orders from Europe to the SEA region amidst increasing cost arising from: (i) European wood manufacturers having increased their ASPs substantially; and (ii) increase in logistic cost as a result of increasing energy prices in Europe and lingering supply chain issues. Hevea benefitted greatly from this trade diversion and was able to expand its market share in Japan, capitalizing on its vast experience and foothold in the Japanese market (its products are already in compliance with the stringent Japanese standards). Riding on this demand increase, Hevea will be investing RM10m capex to add a new short cycle line to produce value-added boards (e.g. MFC laminated boards) that will provide a higher margin compared to its raw boards.

Dividend. Hevea recently announced a final single-tier dividend of 1.0 sen per ordinary share in respect of FY21 despite making a LAT of -RM1.2m. Historically, Hevea has consistently paid dividends far exceeding its dividend policy of >30% of its PAT (see Figure #1). Based on its generous dividend payout track record supported by its healthy NCPS of 17 sen, we are projecting FY22 DPS of 2.5 sen (based on 53.2% payout ratio), which translates to a decent dividend yield of 4.8%.

Outlook. Despite the underutilization of its particleboard plant at the beginning of the year, we believe that the earnings impact from this will be partially mitigated by the shipment of the deferred finished goods from previous quarter as well as the strong sales volume from its RTA segment. As the raw material supply has returned to a healthy level, we anticipate that Hevea should see sequential improvement in 2Q. This improvement is further bolstered by the increasing particleboard export sales to the Japanese market that fetch a better margin compared to other export markets. While we are cognizant that glue cost is increasing following the oil price hike, we understand that the price level is still well below its peak in Dec 2021.

Forecast. Unchanged.

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 (32.3% of its market capitalization).

Source: Hong Leong Investment Bank Research - 13 Apr 2022