Highlights

• Minimal impact from minimum wage hike. Management sees little impact from minimum wage hike (which will be raised by RM100 to RM900/month effective 1 Jul 2016), as it has less than 400 unskilled workers earning minimum wage.

• Cost rationalization exercise benefits have started kicking in gradually. Moreover, the company is gradually reducing headcount through its cost rationalization exercise (which involves investment into new chipping plant and new finishing line), which will also result in improved production efficiency and lower energy cost apart from reducing labour force. We note that part of the benefits from its cost rationalization exercise has started kicking in since 3Q15 and full benefits from such exercise will be seen by end-FY16.

• RTA to start contributing to bottom lines by 2H. Cost rationalization exercise apart, Evergreen’s move to expand product range (ready-to-assemble furniture, RTA, via the investment into a new production line) will start contributing to its bottom lines by 2H FY16. We understand that Evergreen could potentially expand capacity of the RTA production line, pending feedback from its customers.

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 6.3-21.9%, largely to account for: (1) A higher US$:MYR assumption of RM3.85/US$ (from RM3.80/US$ previously for FY15) and RM4.00/US$ (from RM3.80/US$ and RM3.70/US$) in FY16-17; and (2) Contribution from RTA line.

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 BUY recommendation with a higher TP of RM2.75 (from RM2.53 previously), as we raise our earnings forecasts and roll forward our valuation base year to FY17 (from FY16). Our TP of RM2.75 is based on 11x FY17 revised EPS of 25 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 - 15 Jan 2016