• One of the top five MDF producers in Asia. Evergreen Fibreboard is one of the top 5 producers of engineered wood-based products in Asia, which products consisting mainly Medium Density Fibreboard (MDF) and particleboard, with combined annual production capacity of more than 1.3m m³. In addition to its MDF and particle board production lines, Evergreen owns 2 resin plants in Malaysia (which manufactures glue for its own consumption) and 4,410 acres of rubber plantation land (more than 500 acres have already been planted with rubber trees) in Kahang, Johor.
• Turnaround since 3Q14. EVERGRN’s earnings s tarted deteriorating s ince 2012 (and it recorded 7 consecutive quarters of net losses, see Figure 2), mainly due to several issues including: (1) Higher cost of log concessions; (2) Entrance of new MDF players and aggressive capacity expansion by existing MDF players, which have in turn resulted in oversupply of MDF in the ASEAN region; and (3) Higher crude oil prices, which have in turn resulted in high production cost (as glue is one of the major cost components in producing MDF). 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$), Evergreen saw its performance improving and turned profitable since 3Q14. HLIB estimates PBT to grow at 67% CAGR from FY14-FY17.
• HLIB calls a BUY rating on EVERGRN with an institutional target price of RM1.47, or 25.6% upside. Overall, the robust 91.8% surge in share price YTD has not fully reflected operational improvement, as we anticipate EVERGN’s earnings prospects to remain bright in the nea r to medium term, underpinned by s everal factors including: 1. Management’s ongoing efforts to improve operational efficiencies and financial performance will only be gradually reflected in the next 1-2 years; 2. Lower raw material costs, in particularly, log and adhesive prices (which collectively account for 55-65% of the production cost of MDF); and 3. Strong US$, which is beneficial to EVERGN’s bottomline as it derives 65-70% of its revenue from export sales.
• Poised to stage an Ascending Triangle” breakout. After hitting 52-week high of RM1.28 (26 Mar), share price is taking a breathier and forms “As cending Triangle” pattern. We opine that share price is gradually gaining upside momentum and is pois ed for “As cending Triangle” breakout after a brief sideways consolidation, as indicated by an ‘inverted hammer’ candles tick formation yesterday. Meanwhile, grossly oversold oscillators (RSI, Slow Stochastics and MACD), may cushion further downside.
• Further upside targets are RM1.21 (16 & 17 Apr high) and RM1.28, with long term target price of RM1.38 (measurement objective of Ascending Triangle breakout). Immediate supports are located at RM1.10 (23.8% FR) and RM1.08 (50-d SMA). Cut loss below RM1.06.

Source: Hong Leong Investment Bank Research - 23 Apr 2015