Hevea recorded 1Q22 core net profit of RM4.8m, which we deemed within our expectation as we expect further earnings improvements in the coming quarters supported by the current strong USD/MYR exchange rate as well as the sustained strong demand for its particleboards from the Japanese market. Nonetheless, we are cognizant of the uncertainties surrounding its raw material costs as well as lingering supply chain issues which pose downside risks to our earnings forecasts. Maintain BUY with an unchanged TP of RM0.63 pegged to P/B multiple of 0.85x based on mid-FY23 BVPS of RM0.74. In addition, the group also has a healthy balance sheet of NCPS of 21.1 sen, which should benefit under the current interest rate upcycle.

Within expectations. Hevea recorded 1Q22 core net profit of RM4.8m (-33.3% QoQ; 1Q21: -RM1.8m) making up 17.8% of our FY22 forecast of RM27m. We deem the results within expectations as we expect further earnings improvements in the coming quarters. Core PATAMI was arrived at after adjusting for foreign exchange gain of RM0.4m.

Dividend. None (1Q21: None).

QoQ. Revenue increased by 12% mainly contributed by the RTA segment (+30.8%) but partially offset by the particleboard segment (-13.7%). The decline in particleboard revenue was due to a production halt of its particleboard factory in Jan due to tight wood supply caused by floods towards the end of Dec 2021. Despite the increase in revenue, the group recorded a lower core net profit of RM4.8m (-33.3%) due to higher raw material costs as well as lower contribution from the particleboard segment which provide a better profit margin compared to the RTA segment.

YoY. Revenue increased by 29.2% on the back of improvements in the particleboard (+20.5%) and RTA (+34.1%) segments. Despite lower sales volume in the particleboard segment due to the reasons mentioned above, the higher revenue in this segment was contributed by better product mix that command a higher ASP as well as the stronger USD/MYR exchange rate. Consequently, core net profit rebounded to RM4.8m from -RM1.8m SPLY.

Outlook. Hevea is continuing on its recovery path from last financial year’s performance as it recorded commendable results this quarter despite the short closure of its particleboard plant earlier this year. Going forward, barring any unforeseen circumstances, we foresee sequential improvements in the subsequent quarters mainly coming from (i) stronger USD to MYR exchange rate (2QTD: RM4.31/USD) as >90% of the group’s sales are denominated in USD while costs are mainly in MYR; (ii) sustained stronger demand for value-added boards from the Japanese market; (iii) continued scaling up in the utilization rate of its fungi cultivation segment and; (iv) potential capacity increase in the RTA segment from foreign labour intake. Nonetheless, we are cautious on the uncertainties surrounding raw material costs as well as lingering supply chain issues which will exert pressure on the group’s profitability as Hevea typically does not adjust its selling price often.

Forecast. We updated our model for FY21 audited accounts and introduce FY24 forecasts. Post adjustments, our FY22/23 forecasts increase by 0.7%/0.6%.

Maintain BUY with an unchanged TP of RM0.63 pegged to a P/B multiple of 0.85x based on mid-FY23 BVPS of RM0.74 (rolled over from FY22). We remain positive on the group’s outlook in FY22 for the reasons mentioned above. In addition, the group has a healthy balance sheet with net cash of RM119.6m or NCPS of 21.1 sen (40.3% of its market capitalization) which should benefit under the current interest rate upcycle.

Source: Hong Leong Investment Bank Research - 19 May 2022