We met with Evergreen and we were encouraged by the group’s prospects going forward. The group has decent earning visibility, securing panel board orders up to Jan 2021 and RTA orders up to July 2021. ASPs for panel boards are on an uptrend this year, albeit slowing down to a more moderate rate currently. The current levels of ASPs are attractive and provide room to buffer for moderate increase in raw material costs. With the group pivoting to producing more downstream products as well as focusing more on supplying to the local market, this also provides the company with better PBT margin. Our forecasts remain unchanged. We maintain our TP at RM0.65. Maintain BUY.

We met with Evergreen and were encouraged by the group’s prospects going forward.

A turnaround story. Evergreen was in the red since 4Q18, but returned to profitability in the recent 3Q20 (Figure #1). The company was previously in the red due to an oversupply in the panel boards market as local manufacturers faced competition from regional players such as Thailand and Vietnam. The stronger earnings were on the back of higher ASP for particle boards and stronger furniture market demand (RTA division) especially from the US. The stronger demand from US was a result of the US-China trade war, where US diverted its trade from China market to other manufacturers in the region, which benefitted Malaysia manufacturers. In addition to that, the rise in work-from-home (WFH) arrangements from Covid-19 also led to an increase in furniture purchases in key markets (i.e. higher furniture exports by Malaysia than pre-Covid levels; Figure #2). As a result, panel board manufacturers also experienced a secondary effect in the demand recovery for panel boards due to demand from the furniture makers.

Sales mix. Currently, panel boards account for 70-80% of Evergreen’s revenue, with 30% from particle boards and 70% from medium density fibreboard (MDF). Downstream products, RTA and value-added boards account for 20-30% of its revenue.

Particle boards division. Since the beginning of the year, ASP for particle boards increased by around 5-7% each quarter and moderated to 1-2% in 4Q20. Currently, Evergreen supplies bulk of its particle boards to local Muar furniture makers. The export market for particle boards remains competitive due to competition from players from Thailand and Vietnam. Particle board current orders are secured until Feb 2021. Management expects this segment to continue to do well due to current high level of ASP and strong demand.

MDF division. While MDF also benefitted from the increase in demand from Muar furniture makers, it was less pronounced than particle boards. This is because furniture makers mostly use particle boards (around 70-100%) compared to MDF (0- 30%) in their production, depending on their target market segment and business model. Evergreen managed to narrow the loss in the MDF segment in 3Q20 compared to previous quarter. MDF current orders are secured until mid-Jan 2021. Management expects MDF segment to breakeven in the coming year, provided that the price and cost remains at current level and the Batu Pahat MDF line that was down earlier due to fire resumes operation in Dec 2020. The ongoing cost restructuring efforts, such as consolidating production lines have also resulted in better fixed cost per cubic meter for the MDF segment.

RTA and value-added boards division. Value-added boards (lamination and coating) and RTA segments performed better due to an increase in demand for furniture. The RTA segment also benefitted from higher demand from the US market, which now constitutes 50% of the export of RTA, followed by Europe (30%), Japan(10%) and other market. Value-added board output increased by 40% in Sep 2020 compared to Jan 2020, while for RTA, output doubled in 3Q20 compared to 2019. RTA current orders are secured until July 2021. Management expects RTA segment to continue to do well due to current high level of ASP and strong demand.

Outlook. Evergreen returning from red to black in 3Q20 was encouraging. The group also has decent earning visibility, securing panel board orders up to Jan/Feb 2021 and RTA orders up to July 2021. YTD, the ASP for particle boards increased by about 20%, but the increase in price looks to be slowing down and stabilizing at the moment. Nevertheless, at current ASP, it is still attractive and provides enough room to buffer for moderate increase in raw material costs. Furthermore, increase in particle board ASP has narrowed the gap of the price of particle boards and M DF, which makes MDF relatively more attractive in terms of pricing for its better quality. As Evergreen is also pivoting to producing more downstream products as well as focusing more on supplying to the local market, this also provides the company with better PBT margin.

Forecast. Unchanged.

Maintain BUY. TP: RM0.65. We maintain our TP of RM0.65 pegged to an unchanged PB of 0.5x (5-year mean). At current price level, we reckon Evergreen’s valuations are depressed, at just 0.3x PB.

Source: Hong Leong Investment Bank Research - 17 Dec 2020