2Q19 core net loss of RM11.3m brought 1H19 core net loss to RM23.6m (vs. core net profit of RM13.2m in 1H18). The results missed expectations, as we were projecting core net loss to narrow in 2Q19. The wider-than-expected core net loss was due mainly the lower-than-expected MDF ASP, MDF sales volume, and higher-than-expected raw material prices. We widen our FY19/20/21 core loss forecasts to RM15.4m/RM7.9m/RM2.1m to account for continued low volumes, ASPs in 3Q19, as well as stubbornly expensive rubberwood price. We reduce our PB multiple to 0.16x pegged to -1.2SD of historical 2-year PB (from 0.2x). Our TP is lowered from RM0.27 to RM0.22. Our SELL call is maintained.

Below expectations. 2Q19 core net loss of RM11.3m (vs. core net loss of RM12.3m in 1Q19 and core net profit of RM5.6m in 2Q18) brought 1H19 core net loss to RM23.6m (vs. core net profit of RM13.2m in 1H18). The results missed expectations, as we were projecting core net loss to narrow significantly in 2Q19 (from 1Q19). The wider-than-expected core net loss was due mainly the lower-than-expected MDF ASP, MDF sales volume, and higher-than-expected raw material prices (in particularly, rubber log wood).

Dividend. None declared. (1H19: None) (1H18: None)

QoQ. Despite higher average selling prices (ASP), lower sales volumes resulted in sales decline of 5.6%. Slightly narrower core net losses of RM11.3m (from RM12.3m core net losses in 1Q19) were due to higher ASP.

YoY. Malaysia sales declined 15.3% from weaker sales volume due to intense competition in the region despite higher ASP as a result of weaker ringgit. Losses before tax of RM3.8m (vs. PBT of RM6.5m in 2Q18) were due to similar reasons. Losses before tax in Thailand market of RM6.3m (from RM7.5m PBT in 2Q18) were due to lower selling price, lower sales volumes, higher cost of log and higher operational cost from low sales volume. Losses from both Malaysia and Thailand markets resulted in Group core net loss of RM11.3m (from core net profit of RM5.6m in 2Q18).

YTD. Both Malaysia and Thailand markets suffered from lower volumes and ASP from intense regional competition. Higher operational costs (from lower sales volumes) and higher log cost in Thailand market resulted in Evergreen posting core net losses of RM23.6m (vs. RM13.2m core net profit) in 1H18.

Unfavourable macro factors abound. Evergreen guided that the panel board market will likely remain competitive with continued additional capacities from neighbouring countries coming on stream. As such, we expect continued tepid volumes and ASP in 3Q19. On the cost side, we understand that price of rubber log wood have remained stubbornly high in 3Q. However, we expect glue prices to gradually decrease in 2H as crude oil price has reduced since peaking in 1H19 (glue prices generally mirror crude oil price).

Forecast. We widen our FY19/20/21 core loss forecasts from RM5.3m/4.4m/0.4m to RM15.4m/RM7.9m/RM2.1m to account for continued low volumes and ASPs in 3Q19, as well as stubbornly expensive rubber wood price.

Maintain SELL. In the near term, we expect unfavourable macro factors mentioned above to continue to plague the Group. We reduce our PB multiple to 0.16x pegged to -1.2SD of historical 2-year PB (from 0.2x pegged to -1SD). After our earnings adjustment and change in PB multiple, our TP is lowered from RM0.27 to RM0.22. Our SELL call Is Maintained.

Source: Hong Leong Investment Bank Research - 30 Aug 2019