3Q19 core net loss of RM9.0m (vs. core net loss of RM11.3m in 2Q19 and core net profit of RM3.2m in 3Q18) brought 9M19 core net loss to RM32.6m (vs. core net profit of RM16.4m in 9M18). The results missed expectations, as we were projecting core net loss to narrow significantly in 3Q19 (from 2Q19). The results shortfall was due mainly the lower-than-expected MDF ASP, MDF sales volume, and higher-than-expected raw material prices (in particular, rubber log wood). We widen our FY19/20/21 core loss forecasts from RM15.4m/ RM7.9m/ RM2.1m to RM34.0m/ RM23.3m/ RM13.1m to account for continued low volumes and ASPs in 4Q19, as well as stubbornly expensive rubber wood price. Despite lower forecasts, our TP of RM0.22 is maintained pegged to an unchanged 0.16x PB (-1.2SD of historical 2-year PB) of FY18’s BVPS of 1.37. Our SELL call is maintained.

Below expectations. 3Q19 core net loss of -RM9.0m (vs. core net loss of -RM11.3m in 2Q19 and core net profit of RM3.2m in 3Q18) brought 9M19 core net loss to - RM32.6m (vs. core net profit of RM16.4m in 9M18). The results missed expectations, as we were projecting core net loss to narrow significantly in 3Q19 (from 2Q19). The results shortfall was due mainly the lower-than-expected MDF ASP, MDF sales volume, and higher-than-expected raw material prices (in particular, rubber log wood).

Dividend. None declared (3Q18: none). (9M19: None, 9M18: None)

QoQ. Despite lower MDF ASPs, higher selling volume resulted in revenue rising 7.6% to RM249.5m. Core net losses slimmed to -RM9.0m from -RM11.3m in tandem with better sales.

YoY. Weaker sales in both Malaysia (-16.2%) and Thailand (-19.6%) were due to lower MDF sales volumes and ASPs due to intense competition in the region. Core net losses of -RM9.0m (vs. core net profit of RM3.2m in 3Q18) were due to weaker sales, as well as higher log cost and higher operational cost associated with lower sales volumes.

YTD. Losses before tax from Malaysia and Thailand of -RM7.4m and -RM17.4m vs PBT of RM13.3m and RM19.3m respectively was due to similar reasons mentioned in the YoY segment above. Additionally, higher costs associated with lower sales volumes resulted in core net losses of -RM32.6m (vs core net profit of RM16.4m in 9M18).

Unfavourable macro factors abound. Evergreen guided that the panel board market will likely remain competitive with continued intense competition from neighbouring countries coming on stream. As such, we expect continued tepid volumes and ASP in 4Q19. On the cost side, we understand that price of rubber log wood have remained stubbornly high in 4Q. While we expect Evergreen to continue to pursuit cost saving measures, 4Q19 will likely register another round of losses.

Forecast. We widen our FY19/20/21 core loss forecasts from RM15.4m/ RM7.9m/ RM2.1m to RM34.0m/ RM23.3m/ RM13.1m to account for continued low volumes and ASPs in 4Q19, 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. Despite lower forecasts, our TP of RM0.22 is maintained pegged to an unchanged 0.16x PB (-1.2SD of historical 2-year PB) of FY18’s BVPS of 1.37. Our SELL call is maintained.

Source: Hong Leong Investment Bank Research - 4 Dec 2019