1Q21 core net loss of -RM1.8m (4Q20: RM9.7m; 1Q20: RM1.3m) was below our expectations against our full year forecast of RM18.0m. The shortfall in earnings was due to higher raw material cost. We lower our FY21/22 forecasts by -26.9%/- 21.4% to account for higher raw material costs. We maintain HOLD with a lower TP of RM0.65 from RM0.66 pegged to an unchanged P/B multiple of 0.9x based on FY21 BVPS after adjusting for lower earnings. Despite the elevated raw material cost, we expect Hevea’s earnings to improve in subsequent quarters supported by the strong demand for its products. In addition, with its healthy balance sheet of NCPS of 7.9 sen, we opine that Hevea will be able to weather through these near term headwinds.

Below expectations. 1Q21 core net loss of -RM1.8m (4Q20: RM9.7m; 1Q20: RM1.3m) was below our expectations against our full year profit forecast of RM18.0m. The shortfall in earnings was due to higher raw material cost. Core LATAMI was arrived at after adjusting for foreign exchange gain of RM0.9m.

Dividend. None Declared (1Q20: None).

QoQ. Revenue declined -19.2% on the back of the decline in sales volume at particleboard and RTA segments, which in turn were due to (i) a 2-week scheduled maintenance shutdown at particleboard production facilities, and (ii) a 2-week closure at its RTA production facilities (as there were Covid-19 cases detected in the premise). The group recorded a core net loss of -RM1.8m (from a core net profit of RM9.7m in 4Q20) due to higher glue cost as well as due to weaker operating leverage as the group was not able to achieve optimal production efficiency due to the downtime in the factories.

YoY. Revenue increased by 9.5% due to (i) higher sales volume and selling prices at particleboard segment, and (ii) higher selling prices at RTA segment. Despite the increase in revenue, bottomline recorded a core net loss of -RM1.8m (from a core net profit of RM1.3m SPLY) due to mismatch between its product selling prices and prices of key raw materials (particularly, glue and rubber wood).

Outlook. Provided there are no further production disruptions, we expect Hevea’s earnings to improve in subsequent quarters supported by the strong demand for its products with current order book visibility of up to 3-4 months. In addition, the delay in shipment of products from the closure of factories in 1Q21 will also result in higher revenue recognized in 2Q21. Nonetheless, we expect the current high rubber wood and glue costs will continue to exert pressure on the group’s profitability. Rubber wood cost may remain elevated if the current wet weather persists, while glue cost will depend on crude oil price.

Forecast. We lower our FY21/22 forecasts by -26.9%/-21.4% to account for higher raw material costs. We also introduce FY23 forecasts.

Maintain HOLD, TP: RM0.65. After adjusting for lower earnings, our TP decreases from RM0.66 to RM0.65 pegged to an unchanged P/B multiple of 0.9x based on FY21 BVPS. With its healthy balance sheet of NCPS of 7.9 sen, we opine that Hevea will be able to weather through these near term headwinds.

Source: Hong Leong Investment Bank Research - 26 May 2021