Highlights

• The absence of pricing premium (as a result of demand weakness), coupled with rising transportation cost to the Middle East (as transportation costs are borne by Evergreen), management has started diverting its marketing efforts from the Middle East back to the Southeast Asian region.

• Despite the ASP pressure for MDF products, we continue to see strong earnings prospects in the company.

• Renewed weakness in MYR against the US$ arising from more hawkish Fed and lackluster domestic market outlook is a boon to Evergreen’s earnings.

• Costs of key inputs (i.e. rubber log wood and glue) continue to trend lower, and these will partly alleviate margin pressure from lower ASP.

• Evergreen is on track to reap more benefits from its cost rationalization exercise.

• The new RTA furniture line has commenced commercial operations since May-16. Having convinced about the potential of the RTA furniture business, Evergreen has placed deposits for an additional RTA furniture line, which is expected to commence operation (hence contributing to its bottom line) by 2HFY17.

Risks

• Escalating raw material and labour costs;

• Weaker-than-expected demand for MDF; and

• Fluctuating foreign currency movement (in particularly the US$).

Forecasts

• FY16 net profit forecast lowered by 10.7% to RM102.8m, largely to account for: (1) Lower blended ASP assumption for MDF; and (2) Lower rubber log wood cost assumption

• FY17 net profit forecast remains unchanged at RM123.4m as our lower blended ASP assumption for MDF products is offset by: (1) Lower rubber log wood cost assumption; (2) Contribution from the additional RTA production line; and (3) An upward revision in our US$:MYR assumption.

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.

• Negative – Demand weakness from Middle East.

Valuation

• Maintain BUY recommendation with unchanged TP or RM1.60 (based on unchanged 11x FY17 core EPS of 14.6 sen).

Source: Hong Leong Investment Bank Research - 3 Jun 2016