Highlights

• We reiterate our positive view on Evergreen following our recent meeting with management.
• Taking cue from the adverse weather condition (which has resulted in log supply shortage, hence higher log cost) and glue cost (arising from higher crude oil price), we opine that 1Q17 earnings performance (due out in end-May) will come in weaker (both yoy and qoq).
• ? but we see better 2H17 Despite having anticipated a weak set of 1Q17 results, we remain positive on Evergreen?s earnings fundamentals, underpinned by: (1) Evergreen?s move to diversify into tropical wood-based products; and (2) Commencement of operation of the new particleboard line and additional RTA furniture line. Besides, we opine that higher overall production capacity (from 2H17 onwards) will result in higher glue usage, hence resulting in improved economies of scale at its glue plant.
• Diversification into tropical wood-based MDF to reduce dependence on rubber wood? Evergreen is slowly diverting its dependency on rubber wood and moving to tropical mixed wood (TMW) which costs an additional RM10 per tonne as compared to rubber wood. TMW are fungus resistance board which translates to a 20% higher selling price.
• New particleboard line to contribute to Evergreen?s bottomline from 2H17? The new particleboard production facility in Segamat (which has capacity of 20,000m�/month) will start contributing to Evergreen from Jul-17 onwards. We are convinced that capacity at Evergreen?s new particleboard line can be easily taken up, due to the shortage for particleboard locally (as local furniture manufacturers, which are the main consumer of particleboard, are currently importing particleboard from neighbouring countries).

Risks

• Escalating raw material and labour costs;
• Weaker-than-expected demand and selling prices for MDF; and
• Earlier-than-expected strengthening of MYR (against the US$).

Forecasts

• Maintained.

Rating

BUY (↔)

• We believe that the higher raw material cost will be mitigated by: (1) commissioning of the new particleboard line, (2) higher operational efficiency which in turn converts to stronger bottom line and (3) the prevailing USD/MYR exchange rate of RM4.33/US$ is still in exporters? favour.

Valuation

• Maintain BUY recommendation with unchanged TP of RM1.20 (based on unchanged 11x FY17 core EPS of 10.7 sen).

Source: Hong Leong Investment Bank Research - 03 May 2017