Highlights

• Our recent small group meeting with Evergreen’s management reaffirms our positive view on the company’s earnings visibility.

• The continued rise in US$ is positive for Evergreen’s earnings, as 70% of its total revenue is denominated in US$ whilst only 25-30% of its production cost is denominated in US$. Currency movement aside, we understand the prices of key inputs (including rubber log wood, urea and methanol) are moving in favour of Evergreen’s earnings.

• Management remains committed to further enhance its earnings performance by improving its overall production efficiency and diversifying its product range to the downstream segment (which has better profit margin and less susceptible to price competition).

• Despite its higher capex commitment for the next 2 years, we expect its net gearing to remain below 0.3x given its ability to generate relatively strong operating cash flow.

Risks

• Escalating raw material 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

• FY15-17 net profit forecasts raised by 3-15%, largely to reflect higher utilization rate and average selling price assumptions.

Rating

BUY

Positives

• (1) A beneficiary of strong US$ and low oil price; (2) Healthy balance sheet; and (3) Rubber plantation land bank value has yet to be reflected in current share price valuation.

Negatives

• Illiquid share trading volume.

Valuation

• TP lifted by 8.2% to RM1.59 based on unchanged 10x average 2015-2016 revised EPS of 15.9 sen, and this represents an upside of 31.4%. At share price of RM1.21, Evergreen is trading at FY15-16 P/E of 8.4x and 7x respectively. Excluding the value of its 4,410 acres of rubber plantation land in Johor, current share price is only valuing Evergreen at FY15-16 P/E of 7.9x and 6.5x respectively.
• Maintain BUY recommendation.

Source: Hong Leong Investment Bank Research - 17 Jun 2015