Highlights

• We continue to see value to the company, due to: (1) A stronger-than-expected US$ against the MYR, which in turn is favourable to Evergreen’s bottomline; (2) Benefits from management’s ongoing efforts to improve Evergreen’s operational efficiencies will start kicking in gradually from 2H 2015, in our view.

• YTD, US$: MYR averaged at MYR3.82/US$ (see Figure 2), 6.1% higher than our assumption of MYR3.60/US$. A persistently strong US$ (which in turn translates into higher selling prices in MYR terms), sustained sales volume, coupled with low key input prices (including glue and rubber log wood) will continue to drive Evergreen’s earnings higher.

• Currency and key input prices aside, we believe part of management’s ongoing efforts to improve its operational efficiencies will start kicking in from 2H 2015 onwards (albeit on a gradual basis) and this will in turn result in improved production cost.

• Beyond 2015, we still see strong earnings growth visibility in the company, underpinned by management’s ongoing efforts to improve operational efficiencies and expand product range. We also expect MYR to remain weak vis-àvis the US$, which is positive to its bottom lines.

• We continue to see the possibility of Evergreen resumes paying dividends as early as 2016, given its improving earnings fundamentals.

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 12.2-21.6% respectively, largely to account for a higher US$MYR assumption of RM3.80/US$ (vs. RM3.60/US$ previously).

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

• Maintain our BUY recommendation, with a higher TP of RM2.53 (from RM2.10 previously) based on unchanged 11x but revised 2016 EPS of 23 sen. We continue to like Evergreen for its strong earnings visibility, underpinned by a strong US$ (against the MYR), low key input prices, as well as management’s ongoing efforts to further improve its operational efficiencies and expand its product range.

Source: Hong Leong Investment Bank Research - 27 Oct 2015