Evergreen’s was served with a Writ of Summons and Statement of Claim by the shareholders of its subsidiary in Indonesia for a total asked amount of ~RM329m. Management assured that, business operations in Indonesia will not be affected as the plaintiffs were not involved in running the business. In the worst case scenario that the group have to compensate the full asked amount, net gearing will increase to 0.37x and earnings may turn into the red as a result of higher interest expense, however this is unlikely to happen. We keep our forecast unchanged, maintain HOLD with an unchanged TP of RM0.37 based on P/B of 0.28x (historical 5-year low).

NEWSBREAK

Evergreen’s Indonesia subsidiary (51% ownership) PT Hijau Lestari Raya Fibrebaord (PT Hijau) had on 16th April 2019 been served with a Writ of Summons and Statement of Claim by PT. Hutrindo Jaya Fibreboard Manufacturing and PT Uforin Pranjen Adhesiv Industry (both in total own the remaining 49% in PT Hijau). Both the plaintiffs wish to claim for material losses of Rp133bn (~RM39m) and immaterial losses of Rp1trn (~RM 290m). The plaintiffs accused PT Hijau for:- 1) Appointment of an incompetent Director and alleged the Director’s appointment is in conflict with principle of good corporate governance which may potentially cause major loss to PT Hijau. Thus, the plaintiffs wish for the appointment of the Director to be cancelled. 2) The construction of the New Port (Jetty) is allegedly to have violated the provisions contained in Article of Association of the company and the statutory provisions that apply in the Republic of Indonesia.

HLIB’s VIEW

Indonesia’s operation. For the uninitiated, Evergreen’s Indonesia operation dominates ~8-10% of total production, and its main focus is in the production of MDF. The abovementioned jetty is a new pier built by the company about two years ago to enable their private loading to ease business operations without going through the congested government ports.

Operations will not be affected. Management assured that business operations in Indonesia will not be affected by the litigation, as both the plaintiffs were not involved in running the business. The Board is of the view that this litigation case brought against Evergreen by the plaintiffs is with bad faith with the purpose of pressuring Evergreen to buy the plaintiff’s shares at an unjustifiable value as requested by them.

Worst case scenario, but unlikely. In the event that Evergreen loses the case and the plaintiffs are awarded the asked amount (~RM329m), the company’s current net gearing position of 0.09x will increase to 0.37x. The potential additional interest expense could even exceed our current profit forecast of RM3.9m, assuming the group takes up a loan of RM329m to repay the plaintiffs. However, according to Evergreen’s solicitors’ the compensation requested by plaintiffs are not related to losses resulted from allegedly unlawful act and is not supported by reasonable grounds and therefore, there may be a huge chance that it will not be acceptable by court.

Forecast. Unchanged, Pending Firmer Guidance.

Source: Hong Leong Investment Bank Research - 8 May 2019