We met with Evergreen and we are cautiously optimistic on the group’s prospects going forward. We expect Evergreen’s future earnings to be driven by (i) its healthy order book with visibility of 2-9 months; and (ii) the strength in ASP supported by the strong demand from the local furniture makers as well as from the US market. Nonetheless, key challenges faced by the group include (i) risk of further extension to the FMCO shutdown period, (ii) any further increase in raw material price and raw material supply disruption, and (iii) limited shipping availability. We lower our FY21 forecast by -33.5% to account for the loss of capacity due to FMCO. After our earnings adjustment, our TP decreases to RM0.67 pegged to an unchanged P/B multiple of 0.5x based on FY21 BVPS. Maintain BUY.

We Met With Evergreen With the Following Key Takeaways:

Sales mix. Currently, the topline contribution from the product segments are: MDF (~60%), particleboards (~20%) and RTA and value-added boards (~20%).

Panel boards segment. The MDF segment is currently seeing a recovery in demand and ASP mainly driven by (i) increase in demand from Muar furniture makers due mainly to an increase in orders for furniture from the US market; and (ii) increase in demand from the Middle East due to panic buying from customers there to stock up more supply in view of the shipping constraint arising from the global shortage of containers. The utilization rate for the MDF segment is currently close to 100% with order visibility longer than previously. The particleboards segment of the group similarly enjoys an increase in demand from the local furniture makers in Malaysia. The utilization rate for this segment is currently at close to 100% with commendable order visibility.

RTA. The RTA segment of the group sees a surge in demand mainly from the US market, which is a new market with low penetration previously. The utilization rate for RTA segment is currently at close to 100% with strong order visibility. RTA originally has 15m to 20m capex planned. The group has put on hold major plans for expansion due to labour shortage.

Outlook and challenges. We expect Evergreen to post weaker earnings QoQ in 2Q21 due to the 4-weeks temporary production disruption from the FMCO. Nonetheless, we remain optimistic for the group’s overall outlook for FY21 on the back of (i) its healthy order book with visibility of 2-9 months; and (ii) the strength in ASP supported by the strong demand from the local furniture makers as well as from the US market. Key challenges faced by the group include (i) a further extension of the FMCO shutdown period, (ii) any further increase in raw material price and raw material supply disruption and (iii) limited shipping availability (the group mitigates this by supplying more to the local market).

Forecast. We lower our FY21 forecast by -33.5% to account for the 4 weeks loss of annual capacity in the Malaysia operations due to FMCO.

Maintain BUY. TP: RM0.67. After our earnings adjustment, our TP decreases to RM0.67 pegged to an unchanged P/B multiple of 0.5x based on FY21 BVPS. Despite near term challenges faced by the group, we remain optimistic on the group’s overall outlook supported by the strong demand and the strength in ASP across all its product segments.

Source: Hong Leong Investment Bank Research - 14 Jun 2021