Results

• Below expectation. Reported 1H17 core net profit of RM20.3m (yoy: -50.4%), accounting for 25% of our full-year forecast.

Deviations

• Higher-than-expected log and glue cost. Besides that, longer- than-expected shut down of plants for scheduled maintenance (due to the shortage in supply of rubberwood).

Highlights

• QoQ: 2Q17 core net profit fell by 10% to RM9.6m, due to longer than expected scheduled plant shut down for maintenance of more than a week during the Ramadan festive period.
• YoY: Core net profit in 2Q17 declined by 32.8% to RM9.6m (from RM14.3m in 2Q16). This was due to (i) lower sales volume as supply of rubber wood remained tight, and (ii) the scheduled plants shut down for maintenance during the Ramadan festive period.
• YTD: 1H17 revenue rose by 3.1% to RM508.5m due to higher average selling price as Evergreen emphasised on higher premium products. However, core net profit declined by 50.4% to RM20.3m, mainly attributed to higher log cost (due to the wet weather condition) and glue cost (due to the volatile oil price).
• Outlook: We opine that Evergreen’s earnings will improve from 2Q low, underpinned by commencement of operation of the new particleboard line and additional RTA furniture line. Besides, we also opine that log price will start to stabilise after the ban of rubber wood exports by the government.

Risks

• Escalating raw material and labour costs.
• Weaker-than-expected demand and selling prices of MDF.
• Delay in commencement of new production lines (in particularly, RTA and particleboard).

Forecasts

• We lower our FY17, 18 and 19 core net profit forecast by 41.1%, 24.9% and 22.7% to RM47.8m, RM73.3m and RM79.9m to reflect (i) higher log cost assumption (ii) higher glue cost assumption, and (iii) lower particleboard plant utilisation rate assumption of 40%, 60% and 80% for FY17, FY18 and FY19.

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 still weak ringgit against the USD will directly contribute to the topline positively.

Valuation

• Maintain BUY recommendation with lower TP of RM0.95 (previously RM1.05) based on 11x rolled-forward FY18 core EPS of 8.7 sen.

Source: Hong Leong Investment Bank Research - 22 Aug 2017