We met with Evergreen and we are encouraged by its prospects ahead. We opine that with the Covid-19 headwinds subsiding for Evergreen, the worst may be over for the group. We note that the macro environment has turned favourable for Evergreen. In particular, the strong furniture market especially to the US market, rising MDF export demand and ASP as well as the current USD strength are factors that bode well for Evergreen. Furthermore, its successful cost rationalization and additional capacity in Thailand provides further upside for its Thailand segment. We maintain BUY with an unchanged TP of RM0.67 pegged to P/B multiple of 0.5x based on FY21 BVPS.

Recap. The group managed to stay profitable and recorded core net profit of RM2.7m in 2Q21 (vs. -RM10.5m SPLY) despite a one-month closure of its Malaysia operations in June. The positive regional contributions had helped to cushion the losses suffered from the Malaysia’s operations during the quarter. Particularly noteworthy is that Thailand (which had been loss making since 1Q19) saw a turnaround in 2Q21 with PBT of RM4.2m.

Improving panel board demand. The group’s MDF segment enjoyed brisk demand with ASP increasing by 20% YoY in 2Q21. This was driven by (i) the easing of the MDF oversupply situation in the SEA region as supply surplus is gradually absorbed by the market; and (ii) increase in demand from Middle East market due to restocking activities from Middle East in view of the global containers shortage. Economic recovery in Middle East region as well as the logistic supply disruption should support the near to medium term demand from Middle East.

Malaysia operations. The group’s Malaysia operations were shut down since Jun-21 and are expected to resume operations in early Sep, which allows Evergreen to start rebuilding its order book. Management is positive that sales volume will pick up swiftly post business resumption. The RTA segment in Malaysia continues to benefit from strong demand from the US as a result of its trade friction with China. Expansion in capacity of RTA is currently limited by the supply of foreign labour. However, once there is relaxation of foreign labour intake restrictions, there is potential to scale up contribution from RTA going forward.

Thailand operations. Thailand segment is seeing gradual improvement in earnings due to (i) the increase in MDF export demand; and (ii) overhead cost reduction from the improvement in its production efficiency. The group has completed refurbishments for 2 of the boilers in its power plant with 1 more to be completed by Oct 2021. Post refurbishments, we expect better production efficiency and reduced maintenance cost. Separately, in view of the increase in demand in the export market, the group is also scaling up its production, which we expect will contribute an additional capacity of c.20% to its Thailand operations from FY22 onwards.

Indonesia operations. Evergreen spent RM33.2m to increase its stake in its subsidiary PT Hijau Lestari Raya Fibreboard from 51% to 99.99% in Nov-21. Management decided to acquire the remaining stake in the company as they see potential in the Indonesian market due to (i) the underdeveloped furniture market in Indonesia giving rise to growth potential for the group’s panel boards products; (ii) Indonesia has a competitive cost structure; (iii) favourable pricing as sales in Indonesia are denominated in USD while costs are priced in local currency; and (iv) it has a private jetty to ship its wood products which expedite shipment and lower costs.

New lease of life. The recovery path for Evergreen in FY21 was unfortunately marred by Covid-19 headwinds that resulted in production downtime and foreign labour shortage in Malaysia. Furthermore, operation hiccups such as power plant breakdowns and rising raw material costs pose further speed bumps to its recovery trajectory. Nonetheless, we opine that the worst may be over for Evergreen. With a vaccinated workforce, the risk of a workplace Covid outbreak will now be better managed. Furthermore, the risk of another nationwide lockdown (similar to Phase 1) is also less likely to happen as Malaysia is moving towards the new norm of living with the endemic. Overall, the macro environment has turned favourable for Evergreen. In particular, the strong furniture market especially to the US market, rising MDF export demand and ASP as well as the current USD strength are factors that bode well for Evergreen. Furthermore, its successful cost rationalization and additional capacity in Thailand provides further upside for its Thailand segment.

Forecast. We maintain FY21 forecast and raise our FY22/FY23 forecasts by 37.6%/30.4% to account for higher ASP and demand in the MDF export segment as well as the additional capacity from Thailand’s operations.

Maintain BUY with an unchanged TP of RM0.67 pegged to P/B multiple of 0.5x based on FY21 BVPS. We opine that with the Covid-19 headwinds subsiding, the group is on course for a strong recovery supported by the reasons mentioned above.

Source: Hong Leong Investment Bank Research - 6 Sept 2021