Hevea’s 2Q22 core net profit of RM2.3m (QoQ: -52%, 2Q21: -RM3.8m) brought 1H22’s sum to RM7.2m (1H21: -RM5.6m), which accounted for 26.7% of our FY22 forecast of RM27m. The results shortfall was due to lower production output caused by raw material constraints. We lower our FY22/23/24 earnings forecasts by -30.4%/-26%/-21.6% to account for the risk of a slowing global economy impacting demand as well as persistent uncertainty in rubber wood supply. Maintain BUY with a lower TP of RM0.53 (from RM0.63) pegged to a lower P/B multiple of 0.7x (from 0.85x) based on FY23 BVPS of RM0.76. Despite the results shortfall we believe that the group’s initiatives as well as the stronger USD would enable it to ride through any near term challenges.

Below expectation. Hevea’s 2Q22 core net profit of RM2.3m (QoQ: -52%, 2Q21: -RM3.8m) brought 1H22’s sum to RM7.2m (1H21: -RM5.6m), which came in below our expectation, accounting for 26.7% of our FY22 full year forecast of RM27m. The results shortfall was due to lower-than-expected production output in the particleboards segment caused by raw material constraints. 1H22’s core net profit was arrived at after adjusting for foreign exchange gain of RM0.8m.

Dividend. None (2Q21: None). 1H22: 1 sen (1H21: 0.75 sen).

QoQ. Revenue declined by 19.5% due to lower sales volume in its particleboard segment caused by tight rubber wood supply which was mainly affected by bad weather while the lower sales volume in its RTA segment was due to the low season in its main export market Japan as the country comes off its fiscal new year from the previous quarter. However, core net profit decreased by a larger margin of 52% due to weaker operating leverage.

YoY. Revenue increased by 16.4% mainly contributed by the particleboard (+41.5%) and the RTA (+5.2%) segments. The higher revenue in the particleboard segment was mainly due to higher sales of value-added products as well as a stronger USD despite lower sales volume. The better sales volume in the RTA segment was due to longer operational period as there were operational interruptions caused by MCO 3.0 restrictions SPLY. Consequently, core net profit rebounded to RM2.3m (2Q21: -RM3.8m).

YTD. Revenue increased by 23.2% while core net profit came in at RM7.2m (vs -RM5.6m SPLY) due to the same reasons as mentioned in the YoY section.

Outlook. Hevea missed the mark this quarter despite having longer operating days in its particleboard segment as compared to 1Q22 (production halt for 1 month in Jan) mainly due to the persisting issue of tight rubber wood inventory. Looking ahead for 2H22, we anticipate further headwinds arising from the risk of a slowdown in furniture demand (which in turn impacts particleboards demand) due to the soaring global inflation as well as the risk of a global economic slowdown. Nonetheless, continued USD strength (2Q22: RM4.35/USD vs 3QTD: RM4.45/USD) should continue to augur well for Hevea as >90% of its revenue is in USD while most of its costs are in MYR.

Forecast. We lower our FY22/23/24 earnings forecasts by -30.4%/-26%/-21.6% to account for the results shortfall as well as lower sales volume assumptions.

Maintain BUY with a lower TP of RM0.53 (from RM0.63) pegged to a lower P/B multiple of 0.7x (from 0.85x) based on FY23 BVPS of RM0.76 (rolled over from mid FY23). Our lower P/B multiple is premised on the weakening demand outlook due to elevated inflation rate and the risk of a global economic slowdown. Despite anticipating further headwinds ahead, we believe the group should be able to ride through the near term challenge given its recent years pivot to produce higher margin boards and its improvement in production efficiency. In addition, the current USD strength and its seasonally stronger 4Q also should support its 2H22 earnings ahead. Besides, the group also has a healthy balance sheet with net cash of RM132.7m or NCPS of 23.4 sen (51.6% of its market capitalization) which should provide downside support to its share price.

Source: Hong Leong Investment Bank Research - 19 Aug 2022