Highlights

• We believe recent sell down in Evergreen’s shares is overdone.

• We still see earnings growth in Evergreen, underpinned by: (1) The company’s ongoing cost rationalization exercise, which will result in overhead cost savings, reduced transportation cost, better production efficiency, as well as higher quality products; and (2) An investment into a new fully-automated RTA furniture line, which will triple its existing production volume and reduce manpower, hence contributing to its earnings from 2H16 onwards.

• Against its peers in the Southeast Asia region, Evergreen’s share price underperformed by 10.5-21%-pts YTD, indicating that recent sell down is overdone.

• Our valuation has yet to reflect the value of its 4,410 acres of rubber plantation land in Kahang and the industrial land in Masai. We understand that combination of these two non-core assets could potentially fetch selling price of at least RM100m (or 11.6 sen).

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

• Maintained.

Rating

BUY

Positives

• (1) Attractive valuations with good earnings visibility; (2) Healthy balance sheet; and (3) Rubber plantation land bank value has yet to be reflected in current share price valuation.

Negatives

• Perceived US$ play.

Valuation

• Maintain BUY recommendation with unchanged TP or RM1.60 (based on unchanged 11x FY17 core EPS of 14.6 sen).
• Our forecast has already factored in a ringgit forecast of RM4.00/US$ and RM3.80/US$ for FY16 and FY17 respectively.
• We continue to like Evergreen for its strong earnings visibility (underpinned by low key input prices and management’s ongoing efforts to further improve operational efficiencies and product diversification) and decent dividend yield of 3.5%.

Source: Hong Leong Investment Bank Research - 31 Mar 2016