Result

• Below expectation. HeveaBoard Berhad (Hevea) recorded 1Q20 net profit of RM1.9m, which tumbled 5.0% yoy and 74.0% qoq on the back of lower revenue, -13.6% yoy and - 24.9% qoq. The result accounts for 11% of our full year earnings estimates. The weaker-than-expected result was mainly due to lower revenue and margin achieved, especially for its RTA Furniture.

Comment

• RTA Furniture weighed on 1Q20 results. Hevea achieved weaker yoy and qoq performances mainly dragged down by RTA Furniture segment (segmental revenue slid 20.7% yoy and 17.2% qoq whilst PBT slumped 64.6% yoy and 66.7% qoq). This was mainly due to softened market caused by Covid-19 pandemic and also the operation interruption resulted from the movement control order (MCO). However, the Group’s Particleboard segment posted better yoy performance (segmental revenue increased by 6.6% yoy whilst PBT returned to the black in this quarter from a loss in a year ago) as lifted by higher salles and production volumes despite operation being disrupted briefly in March due to the MCO. Furthermore, the favourable USD/MYR lifted the overall performance.

• Proposed final dividend of 1.0 sen/share. Recently, Hevea has proposed a final dividend of 1.0 sen/share for 2019 (vs 1.2 sen/share a year ago), bringing total dividend for the full year to 4.0 sen/share (vs 4.8 sen/share in 2018). This translates into an attractive dividend yield of 9.4% based on current share price.

• Proactive measures to propel Particleboard segment…. Current disturbances in the particleboard market such as shortage of raw materials due to wet weather, lower average selling price due to soft market sentiment, coupled with the trade war between the US and China had impacted Hevea’s bottom line. Therefore, the Group’s operational focus of differentiation through the production of high quality and environmental-friendly products, namely the no-added formaldehyde (“NAF”) and Super E0 products continue to be at the forefront of its business strategy.

• ….. as well as RTA Furniture division. For its RTA Furniture, the Group is also actively pursuing new product and market developments as well as further automation to improve productivity and optimise efficiencies. In 2019, Hevea had invested a further RM2 million on automation and upgrading of our existing machines in order to ensure optimised operational efficiency throughout the year.

Meanwhile, in 2020, the Group will allocate a further RM3.2 million for automation and general improvements to the factory.

• Fungi Cultivation is still under incubation stage. To recap, the Group began its foray into the fungi cultivation sector back in 2017/2018. During the past months, Hevea applied and has been granted the MyOrganic certification, an endorsement of our organic cultivation method, issued by the Malaysian Department of Agriculture. Under the certification, its products are organically assured, free of any unwanted chemical residue, and in full compliance with the Malaysian Organic Standard. In addition, the Group has also ramped up its marketing efforts and expanded its distribution channels. The Group has also been focusing on increasing awareness on the benefits of Eryngii mushroom for a healthy lifestyle through collaborations with several prominent restaurant chains to incorporate our Eryngii mushroom into their menu.

Earnings Outlook/Revision

• We slash our 2020F and 2021F net earnings estimates by 28.3% and 19.6% to RM12.2m and RM16.6m respectively after revising downwards of our revenue and margin for the Particleboard and RTA Furniture segments.

Valuation/Recommendation

• Maintain HOLD on Hevea with an unchanged target price of RM0.42. Our target price is now pegged at P/E of 14.5x 2021F EPS (rolling over from 2020F). We reckon that current share price is well supported by its decent dividend yield of 7-8% for 2020-21F (assuming 2020/2021 DPS of 3.0/3.4 sen versus DPS of 4.0 sen declared in 2019).

Source: JF Apex Securities Research - 24 Jun 2020