Results

• Below expectations. 3Q16 core net profit of RM19m (qoq: 11.7%; yoy: -18.5%) took 9M16 core net profit to RM59.8m (-6.3% yoy). The results came in below expectations, accounting for 67.7% and 72.9% of consensus and our full- year forecasts.

Deviations

• Higher-than-expected of effective tax rate (all wood-based industry players no longer enjoys double tax deduction on freight charges).

Highlights

• QoQ… Although revenue fell by 1.6%, core net profit in 3Q16 rose by 33.4%, on the back of lower cost of log and glue in the Thailand region which all together more than offset lower average selling price.
• YoY… Core net profit in 3Q16 dropped by 2.7% YoY to RM19.0m from RM19.6m which was affected by higher operating expenses and an impairment of RM3.1m of goodwill.
• YTD… 9M16 core net profit declined by 6.3% to RM56.7m, mainly attributed to higher raw material cost and a hike in minimum wage (effective July 2016).
• Going forward, we remain positive on Evergreen due to i) expansion of the new particleboard line in Segamat that will commence commercial operations by 2QFY17 ii) RTA line being automated and its operational expansion with a second RTA line which will commence in 2Q17 iii) benefiting from stronger USD.

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 core net profit forecast by 7.5% to RM75.9m to reflect higher effective tax rate of 24% vs. 20% we assumed earlier. FY17-18 core net profit forecasts remain unchanged as we still believe strong earnings growth is on track, underpinned by the commissioning of particleboard and second RTA line, which will take Evergreen’s earnings to the next level.

Rating

BUY (↔)

• We continue to remain positive on Evergreen mainly on the back of its turnaround plan and the commissioning of the second RTA line. The recent strengthening bias of USD will directly contribute to the topline positively.

Valuation

• Maintain BUY recommendation with unchanged TP of RM1.48 (based on unchanged 11x FY17 core EPS of 13.5 sen).

Source: Hong Leong Investment Bank Research - 29 Nov 2016