• HLIB has a BUY rating with institutional TP of RM0.95, or 21% upside. The principal business activities of Evergreen is in the manufacturing of Medium Density Fibreboard (MDF) which contributed 80% of its FY16 revenue while the downstream processes (Value Added MDF) contributed 15% and the Ready to Assemble Furniture & Wood Products contributed 5%. Its products have market presence in more than 40 countries worldwide with over 600 customers . Over 70% of its products are exported while approximately 30% of the group’s costs are also USD-denominated, primarily for its glue components and imported machinery parts.

• We believe the worst is over for Evergreen and anticipate better times ahead. After the pathetic 2Q17 results amid the severe log supply issues and longer-than-expected shut down of plants for scheduled maintenance (due to the shortage in supply of rubberwood), we opine that Evergreen’s earnings will improve from 2Q, solidified by the commencement of operation of the new particleboard line and the 2 nd RTA furniture line (will start to contribute in 2H17), Besides, we opine that log price will start to stabilize after the ban (effective 1 July) of rubber wood exports by the government.

• Downside risks limited as valuations become attractive after recent slump. We remain positive on Evergreen mainly on the back of its turnaround plan and the commissioning of its capacity expansion coupled with normalisation in production costs, providing an additional revenue stream for the group going forward. Meanwhile, the still weak ringgit/US$ will remain competitive for export oriented companies.
   
• At RM0.785, the stock is trading at 9x FY18 P/E (about 18% below 5-year average P/E of 11x). In terms of P/B, current 0.57x P/B is trading at 26% below its 10-yr P/B of 0.77x and a massive 67% discount against its peer. Overall, we expect a strengthening 2HFY17 with core earnings to jump 35% to RM27.5m, translating to strong earnings CAGR of 29.3% for FY17-FY19, backed by decent yields of 4.5- 5.1% for FY18-19.
   
• Likely to refill the RM0.79-0.82 gap soon. From 52-wk high of RM1.14 (25 Oct 2016), Evergreen’s share price plunged 33.3% to a low of RM0.76 (22 Aug) before settling at RM0.785 yesterday, triggered by further disappointment on its 2Q17 results. However, following the formation of spinning top and long-legged Doji during the recent slump, share prices are likely to bottom up to refill the RM0.79- 0.82 gap soon. A successful breakout above RM0.82 will drive prices further to retest the crucial RM0.85 downtrend line channel. A successful breakout above RM0.85 will spur prices further towards our LT objective at RM0.91 (200-d SMA).
   
• On the flip side, failure to penetrate above RM0.85 will witness share prices to stick in range bound consolidation. Key supports are RM0.76 and RM0.74 (lower channel). Cut loss at RM0.735.

Source: Hong Leong Investment Bank Research - 25 Aug 2017