Results

• Below expectations. 2Q16 core net profit of RM14.3m (qoq: -38.2%; yoy: -46.2%) took 1H16 core net profit to RM40.8m (-0.5% yoy). The results came in below expectations, accounting for only 38.7-39.5% of our and consensus full-year forecasts.

Deviation

• Weaker-than-expected average selling price (ASP) for MDF and higher-than-expected effective tax rate (21.7% vs. our assumption of 18%).

Highlights

• QoQ… Lower ASP for MDF products (resulting from a weaker US$ against the MYR), higher operational cost (arising from scheduled plant maintenance), and higher tax expense (on the back of a higher effective tax rate) dragged 2Q16 core net profit lower by 46.2% to RM14.3m.

• YTD… Despite a flattish revenue, 1H16 core net profit declined by 0.5% to RM40.8m, as higher sales volume was more than offset by higher operational cost (arising from scheduled plant maintenance and shutdown).

• Despite the weak 2Q performance, we remain optimistic on E vergreen’s earnings prospects beyond FY16, due to management’s ongoing efforts to further improve the company’s efficiencies and product di versification, which will lead to stronger earnings visibility from FY17.

Risks

• Escalating raw material and labour costs;

• Weaker-than-expected demand and selling prices for MDF; and

• Delay in commencement of new production lines (in particularly, RTA and particleboard).

Forecasts

• We lower our FY16-17 net profit forecasts by 22.2% and 10% to RM82.1m and RM114m respectively, largely to account for lower ASP and higher effective tax rate assumptions.

Rating

• BUY

• Negative – (1) High earnings sensitivity to exchange rate movement.

• Positive – (1) Healthy balance sheet; and (2) Rubber plantation land bank value has yet to be reflected in current share price valuation.

Valuation

• Post earnings adjustment, our TP is lowered to RM1.48 (from RM1.60 previously) based on unchanged 11x multiple on the revised FY17 EPS of 13.5 sen. Maintain BUY rating on the stock.

Source: Hong Leong Investment Bank Research - 23 Aug 2016