Results

• 4Q16 core net profit of RM13.8m (qoq: -27.6%, yoy: -46.1%) took FY16 core net profit to RM73.6m (-14.5%) The results came in within our expectation, accounting for 97% our full year forecast.

Deviations

• None.

Highlights

• YoY… Core net profit in 4Q16 declined by 46.1% to RM13.8m, affected by lower sales volumes and ASP for MDF products, the absence of deferred tax assets recognition (in 4Q15) and likely losses from sawmill division.

• QoQ…. Although revenue rising by 8.4% to RM262.8m (due to higher sales volumes and ASP), 4Q16 core net profit declined by 27.6% to RM13.8m. This was due mainly to higher costs of rubber log wood and glue (which account for about 2/3 of MDF production cost).

• YTD… FY16 core net profit declined by 14.5% to RM73.6m, dragged by higher rubber wood log cost, lower ASP for Malaysian operations and higher tax expense, which more than offset improved performance from Thailand operation (due to higher plant utilization rate and lower production costs).

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 FY17-18 core net profit forecasts by 25.6% and 14% largely to reflect for higher rubber log wood and adhesive price assumptions (which prices have increased by ~20% YTD on the back of weather-induced shortage and higher crude oil price).

Rating

BUY ( ↔ )

• Despite the downward revision in our earnings forecasts, we still see earnings growth potential for the next 2 years, as we believe higher raw material costs will be mitigated by: (1) Strong US$ (HLIB forecast: RM4.30/US$ in FY17-18 from an average of RM4.00/US$ in FY16); (2) The commissioning of second RTA line and new particleboard line (which are expected to contribute to Evergreen’s bottom lines from 2H17 onwards). Besides, valuations are undemanding, at FY17-18 P/E of 8.8x and 8.1x respectively (assuming our earnings forecasts are met).

Valuation

• Post earnings adjustment, our TP is lowered to RM1.20 (from RM1.51 previously) based on unchanged 11x revised FY17 core EPS of 10.7 sen. Maintain BUY rating on the stock.

Source: Hong Leong Investment Bank Research - 24 Feb 2017