Evergreen’s FY18 core earnings of RM5.9m (-88.9%) came in below our expectation, accounting for 30% of our full-year forecast. Despite revenue growth, earnings were dragged by higher operating cost and intense price competition within the particleboard sub-segment. We revised our FY19/20 earnings downwards by 81%/80% respectively. We maintain our earnings forecast, maintain HOLD with a lower TP of RM0.37 based on P/B of 0.28x (historical 5-year low).

Below expectation. FY18 core net profit of RM5.9m (-88.9%) came in below our expectation, accounting for 30% of our full-year forecast. This was mainly due to higher operating cost and effective tax rate.

QoQ: Revenue was down by 3.3% due to lower sales volume and selling price in both Thailand and Malaysia. Lower top line and higher operating cost environment (arising from higher glue and labour cost) have resulted in a core net loss of RM10.4m from a profit of RM3.2m in 3Q18.

YoY: Revenue improved by 9.1% to RM279.1m mainly from the full recommencement of Thailand, where operation was interrupted due to a fire back in 3Q17. Earnings went into the red as the higher revenue was more than negated by higher operating cost from lower utilisation rate in Malaysia.

YTD: FY18 revenue rose by 9.5% to RM1.1bn, supported by full year contribution of particleboard plant in Segamat (as compared to 6months contribution in FY17) and higher sales volume from Thailand. However, core net profit plunged by 88.9% to RM5.9m mainly attributed to higher operation cost and lower selling price of particleboard.

Prospect remains unexciting for FY19. As a result of the ongoing oversupply of particleboard in the market, we believe Evergreen will continue to be impacted by intense price competition within the particleboard and MDF board sub-segment which will likely to persist, resulting in depressed selling prices in the near to mid-term.

Forecast. We reduce our FY19-20 earnings forecast by 81%/80% respectively to account for lower average selling price for particleboard and MDF and higher operating cost.

Maintain HOLD, with a lower TP: RM0.37 (previously RM 0.43) based on a lower P/B ratio of 0.28x (previously 0.33x) which is its historical 5-year low, justified by weak earnings ahead as losses could potentially persist for the near term quarters ahead. Nonetheless, the stock is rated a HOLD instead of a Sell given that its current P/B is near through levels.

Source: Hong Leong Investment Bank Research - 1 Mar 2019