• EVERGRN remains one of HLIB institutional top small/medium cap picks with target price of RM1.60 or 41.6% upside, based on unchanged 11x FY17 core EPS of 14.6 sen. The valuation could be higher as it has yet to reflect the value of its 4,410 acres of rubber plantation land in Kahang and the industrial land in Masai, as the combination of these two non-core assets could potentially fetch selling price of at least RM100m (or 11.6 sen).
• Further rerating likely amid sound fundamentals and recent unjustifiable selldown. From 52-week high of RM1.71 on 11 Jan, EVERGRN’s s hare prices nosedived 42.2% to RM0.99 on 7 Mar before staging a technical rebound to end at RM1.13 yesterday.
• While we are cognizant that the strong US$ catalyst may no longer play a s ignificant role in driving Evergreen’s earnings, HLIB still expects EVERGRN to record a PBT CAGR of 17.5% over FY15-17, 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; (2) An investment into a new fully-automated ready-to-assemble (RTA) furniture line, which will triple its existing production volume and reduce manpower, hence contributing to its earnings from 2H16 onwards ; and undemanding valuations at FY16-17 P/E of 8.3x and 7.7x respectively despite its strong earnings visibility and recent re-instatement of dividend policy (to pay out at least 25% of its earnings with a decent 3.5% FY17 yield).
• Another up-leg to revisit RM1.25-1.35 zones. Following the recent correction, we believe the stock is ripe again to launch another wave of uptrend. Prices are likely to kick on further from YTD low of RM0.99, supported by the bullish downtrend line breakout and bottoming up indicators coupled with heavy volume of 3.15m shares (54% higher against 1-month average). A decisive breakout above RM1.16 (23.6% FR and 8 Apr high) could take the next leg up towards RM1.25 (upper channel) and our LT objective at RM1.35 (50% FR). On the flip side, a breakdown below RM1.09 (support trend line and 20-d SMA) will lead prices lower towards RM1.06 (50-d SMA) again. Cut loss at RM1.03.
• Attractive risk to reward ratio with 19.5% upside against 8.8% downside. All in, we see an attractive risk to reward ratio for investor with a theoretical entry price of RM1.13 given that the downside to the cut loss zone of RM1.03 is 10 sen (-8.8%) while the upside to the LT price objective of RM1.35 is 22 sen (+19.5%).
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Source: Hong Leong Investment Bank Research - 11 May 2016