Evergreen’s 1QFY19 core losses of -RM12.3 came in below our expectations, the disappointment was due to lower-than-expected sales volume and higher operating cost. Earnings were dragged by higher operating cost and intense price competition within the particleboard and MDF market. In the near term, we expect downward selling price pressure to persist and do not see any catalyst in this counter. We revised our FY19/20 earnings into losses of RM5.3m/RM4.4m respectively. We downgrade to SELL from Hold with a lower TP of RM0.27 based on P/B of 0.20x (-1SD of historical 5-year mean).

Below expectations. 1QFY19 core net loss of -RM12.3m came in below our expectation. This was mainly due to lower-than-expected sales volume and higher operating cost.

QoQ: Revenue was down by -12% due to lower sales volume and selling price in both Thailand and Malaysia. Lower top line and higher operating cost environment (arising from lower efficiency) have resulted in a wider core net loss of -RM12.3m from a loss of -RM10.4m in 4Q18.

YoY: Revenue declined by -7.0% to RM25.7m mainly from the lower sales volume and average selling price. Earnings went into the red as the lower revenue was further dragged by higher operating cost from (1) lower utilisation rate in Malaysia and Indonesia couple with (2) higher raw material cost.

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. On top of that, we expect the upcoming Q2 to continue to record losses.

Forecast. We turn our FY19/20 earnings forecast to losses of -RM5.3m/-RM4.4m respectively to account for lower average selling price for particleboard and MDF and higher operating cost. We also take this opportunity to introduce our FY21 losses of - RM0.4m.

Downgrade to SELL from Hold, with a lower TP: RM0.27 (previously RM 0.37) based on a lower P/B ratio of 0.20x from (0.28x) which is its -1SD of historical 5-year mean, as we do not foresee any catalyst on this counter in the near-term due to continuous downward pressure on selling prices of MDF and particleboard couple the absence of business diversification in Evergreen.

Source: Hong Leong Investment Bank Research - 3 Jun 2019