Results

• Below expectation. Reported 1Q17 core net profit of RM10.7m (qoq: -7.8%; yoy: -59.8%), accounting for 12% of our full-year forecast. We deem the results below expectation, despite expecting earnings to come in stronger in 2H (on the back of the commencement of new particleboard line),

Deviations

• Higher-than-expected of effective tax rate (due to not recognizing deferred tax assets on non-performing companies).

Highlights

• QoQ: 1Q17 core net profit fell by 7.8% to RM10.7m, due to floods in Malaysia (which led to log supply disruption and higher log cost to Evergreen’s MDF operations in Malaysia), but partly cushioned by improved performance at its operation in Thailand (on higher sales volume and ASP for MDF).

• YoY: Core net profit in 1Q17 declined by 59.8% to RM10.7m (from RM26.5m in 1Q16). This was due to adverse weather condition, which has in turn resulted in lower sales volume in Malaysia (as a result in log supply shortage) and higher log cost.

• Outlook: We see better 2H17 and remain positive on Evergreen’s earnings fundamentals, underpinned by 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 economics of scale at its glue plant. In addition, drier weather would also resolve the disruption of log supplies.

Risks

• Escalating raw material and labour costs.

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

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

Forecasts

• We lower our FY17 core net profit forecast by 10% to RM81.1m to reflect higher effective tax rate of 27% vs. 24% we assumed earlier. FY18-19 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 strength of USD will directly contribute to the topline positively.

Valuation

• Maintain BUY recommendation with lower TP of RM1.05 (previously RM1.20) (based on 11x revised FY17 core EPS of 9.6 sen).

Source: Hong Leong Investment Bank Research - 24 May 2017