Highlights

• Evergreen Fibreboard is one of the top 5 producers of engineered wood-based products in Asia, which main products consisting MDF and particleboard, with combined annual production capacity of more than 1.3m m³.

• A turnaround story… Evergreen’s earnings started deteriorating since 2012 and it recorded 7 consecutive quarters of net losses. Having undergone a series of internal restructuring activities (including writing off concession cost, broadening of customer base, and plant enhancements) as well as favourable external factors (in particularly lower log and adhesive prices, and a stronger US$), Evergreen saw its performance improving and turned profitable since 3Q14

• We believe the strong share price performance has yet to fully reflect its true fundamentals, as we anticipate Evergreen’s earnings prospects to remain bright in the near to medium term, underpinned by several factors including: 1. Management’s ongoing efforts to improve operational efficiencies and financial performance will only be gradually reflected in the next 1-2 years; 2. Lower raw material costs, in particularly, log and adhesive prices (which collectively account for 55-65% of the production cost of MDF); and 3. Strong US$, which is beneficial to Evergreen’s bottomline as it derives 65-70% of its revenue from export sales.

Catalysts

• Margin expansion from strengthening of US$ and declining raw material prices (in particularly, rubber log wood and adhesive prices);

• Turning around of other operations including the saw mill and particleboard operations.

• Resumption of dividend policy.

Risks

• Escalating raw material prices and labour costs;
• Slower-than-expected demand for MDF;
• Fluctuating foreign currency movement (in particularly the US$); and
• Slower-than-expected turnaround at the saw mill and particleboard operations.

Forecasts

• We are projecting Evergreen’s net profit in 2015 to multiply from RM0.2m in 2014, to RM64.3-86.3m in 2015 and 2016 respectively, underpinned by: (1) Higher selling prices (arising from a stronger US$ against the RM); (2) Higher sales mix of value added products (which yield better profit margins); and (3) Management’s ongoing efforts in streamlining its operations, which we believe will further improve its cost structure.

Valuation

• We initiate coverage on Evergreen with a BUY recommendation and TP of RM1.47 (based on 10x average 2015-2016 EPS of 14.7 sen), providing an upside of 30%.

Source: Hong Leong Investment Bank Research - 7 Apr 2015