Highlights

• Evergreen’s share price has appreciated by 20.7% since early-Jul (outperforming the index by 20.4%-pts and surpassed our TP of RM1.59), we believe the strong share price performance was due to stronger US$ (against the RM) and declining crude oil price (which are both positive to Evergreen’s earnings).

• In our view, Evergreen’s valuation remains commendable despite the recent strong share price performance, as: (1) MYR will remain under pressure on the back of several issues (namely global monetary policy divergence, low commodity prices, and unresolved political glitches); and (2) Prices of key inputs, namely rubber log wood and glue (which in turn is derived from methanol and urea) remain on downtrend (see Figures 1 & 2), and these are supportive of Evergreen’s earnings.

• MYR and lower key input prices aside, we note that management’s continuous efforts to further improve Evergreen’s output and cost efficiencies, and diversifying its product range will help drive its earnings higher.

• Given the improving earnings visibility and decent balance sheet (with net gearing of less than 0.3x as at 31 Mar 2015), we do not discount the possibility of Evergreen resuming paying dividends by 2016 (although management remains tight lipped on such possibility).

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 particleboard operations.

Forecasts

• FY15-17 net profit forecasts raised by 6.4-12.9% to RM78.7m, RM100.3m and RM103m respectively, largely to account for: (1) A higher US$:RM assumption of RM3.60/US$ (vs. RM3.50/US$ previously); and (2) Slightly lower raw material cost 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.

Valuation

• TP lifted by 35.2% to RM2.15, to reflect: (1) Higher net profit forecasts; (2) The roll forward of our valuation base year (from average 2015-2016 to 2016); and (3) Higher target P/E of 11x (from 10x previous), given Evergreen’s improving earnings visibility. We note that our higher target P/E of 11x is still at 19.5% discount to Vanachai Group’s 2016 P/E of 13.5x.
• Maintain BUY recommendation.

Source: Hong Leong Investment Bank Research - 8 Jul 2015