1Q20 core net profit of RM1.3m (QoQ: -82.1%; YoY: -38.9%) was below expectations, making up just 8.9% of our FY20 forecasts. The shortfall in earnings was due to soft demand arising from Covid-19 impact as well as production disruptions from MCO since mid-March. We lower our FY20/21 forecasts by 35.9%/23.0% to account for weaker sales from Covid-19 impact on demand. Given the challenging outlook ahead, we lower our P/B multiple from 0.5x to 0.4x (-1SD below 2-year historical P/B of 0.6x). Our TP decreases to RM0.33 (from RM0.40 previously). We downgrade our call from Hold to SELL.

Below expectations. 1Q20 core net profit of RM1.3m (QoQ: -82.1%; YoY: -38.9%) was below expectations, making up just 8.9% of our FY20 forecasts. The shortfall in earnings was due to soft demand due from Covid-19 impact as well as production disruptions from MCO since mid-March. Core PATAMI was arrived at after adjusting for foreign exchange gain of RM0.6m.

Dividend. None Declared (1Q19: None).

QoQ. Revenue shrank -24.9% due to weaker Particleboard (-37.8%) and Ready-to Assemble (RTA) (-17.1%) sales stemming from weaker demand from Covid-19 impact. Weaker sales alongside higher operating leverage (fixed cost still incurred during non-production MCO period) translated to core net profit diving -82.1%.

YoY. Despite halt in production in mid-March, higher particleboard volumes led to increased sales of 6.3% (due to low base effect, note that Particleboard sales in 1Q19 was the lowest quarterly sales figure recorded in over 10 years). Meanwhile, RTA revenue decreased 20.7% due to soft demand from Japan due to Covid-19 impact as well as production disruptions from MCO since mid-March. Overall, core net profit declined by -38.9% mainly due to lesser contribution from the RTA division alongside fixed costs still being incurred during the non-production MCO period.

Outlook. We expect Hevea to report losses in 2Q20 due to (i) production disruptions for much of 2Q20 due to MCO restrictions (since stopping operations in mid-March, Hevea returned to 50% production capacity in mid-April and full capacity in mid-May) (ii) 2Q20 is seasonally weak quarter as much of Hevea’s RTA sales cluster around 4Q and 1Q associated with the Japanese New Year. While still small, we expect the fungi cultivation division to continue to face teething issues in the production process and therefore, post losses for the time being.

Forecast. We lower our FY20/21 forecasts by 35.9%/23.0% to account for weaker sales from Covid-19 impact on demand.

Downgrade to SELL. Given the challenging outlook ahead, we lower our P/B multiple from 0.5x to 0.4x (-1SD below 2-year historical P/B of 0.6x). Our TP decreases to RM0.33 (from RM0.40 previously). We downgrade our call from a Hold to SELL.

Source: Hong Leong Investment Bank Research - 30 Jun 2020