Result

• Below expectation. HeveaBoard Berhad (Hevea) recorded 2Q20 net loss of RM4.5m, which tumbled from 2Q19 net profit of RM1.3m and 1Q20 net profit of RM1.9m. Overall, the Group achieved net loss of RM2.6m against 1H19 net profit of RM3.3m. The significant weaker-than-expected result was mainly due to negative impact of movement control order (MCO) pursuant to the Covid-19 pandemic.

Comment

• Losses in Particleboard and RTA Furniture segments. Both sales and production volume of Particleboard segment were lower yoy and qoq mainly due to the market disturbance caused by the Covid-19 pandemic and production interruption caused by the MCO which was enforced by the government on 18 Mar 2020. Although the segment had been granted approval to resume operation during the MCO, however, raw material supply chain was interrupted and this caused 50% idle time at the production line during 2Q20, resulting in higher cost of production as economy of scale was not achieved. Likewise, for its RTA Furniture segment, both top line and bottom line were lower, again, due to the interruption caused by the Covid-19 pandemic and MCO. The restrictions imposed on factories’ operation during MCO resulted in higher cost of operations as optimum capacity could not be attained.
   
• Proposed first interim dividend of 0.5 sen/share. In spite of the poor result, Hevea has proposed a first interim dividend of 0.5 sen/share for 2020 (vs 1.0 sen/share a year ago). This translates into a dividend yield of 1.1% based on current share price.
   
• Expecting better 2H20. We envisage the Group to deliver better 2H20 results as coronavirus impact fades. Also, the relaxation of MCO and reopening of global economy shall gradually reinvigorate the Group’s production as well as export of its particleboard and furniture to overseas. In fact, Hevea has witnessed some improvements in the coming quarters and the management is sanguine on its continuous efforts being put into better cost and efficiency management which could sooner seeing itself out of the woods.

Earnings Outlook/Revision

• We slash our 2020F net earnings estimates by 27.9% to RM8.8m after revising downwards of our revenue and margin for the Particleboard and RTA Furniture segments pursuant to impact of MCO. However, we maintain our 2021F net profit of RM16.6m.

Valuation/Recommendation

• Maintain HOLD on Hevea with an unchanged target price of RM0.42. Our target price is pegged at unchanged P/E of 14.5x 2021F EPS. We reckon that current share price is well supported by its decent dividend yield of 4-6% for 2020-21F (assuming 2020/2021 DPS of 2.0/3.0 sen versus DPS of 4.0 sen declared in 2019).

Source: JF Apex Securities Research - 25 Aug 2020