Post resumption of operations, we understand that there were no major hiccups for Evergreen and order book is improving as sales started to pick up again. Overall cost has increased c.8% on a QoQ basis, but this may be partially passed on to customers due to the current strong demand in the panel boards market. Thailand and Indonesia operations continue to see robust demand and sustained ASP which should contribute positively to the group’s earnings. Maintain BUY with revised TP of RM0.65 (from RM0.67) based on 12x FY22 EPS of 5.4 sen following our switch in valuation methodology to P/E (from P/B). Given the group’s broadening earnings base and well spread production bases as well as the sustained strong MDF and furniture demand, we believe that the group is on course to chart a new growth path going in to FY22.

Order book improving while cost increases. Evergreen has resumed its Malaysia operations since early Sept. Management previously shared that there were no major hiccups in restarting its operations and order book is improving post business resumption. On the cost side, while log cost remains flattish for now, we note that log cost may increase towards year end due to wet season. Glue cost, on the other hand has seen a large increase (+20-30% QoQ), which translates to an overall c.8% increase in COGS. The steep increase is due to: (i) increase in crude oil price (YTD: +63.5%, see Figure #1); (ii) increase in demand for the raw material components: urea in Indonesia and India (as demand for oil palm fertilizers increase) as well as methanol and melamine in China (due to recovery in China economy); (iii) supply shortage due to power outage in China impacting production; and (iv) freight cost increase (c.30% increase QoQ). We believe Evergreen will be able to pass on most of the cost increases to its customers in their next price adjustment owing to the current strong demand in the panel boards market.

Regional contribution. Thailand continues to see strong export demand from the Middle East mainly driven by (i) stocking up activities (as a precaution to supply chain disruption); and (ii) increase in private consumption as more job opportunities were created as a result of increased government spending from higher oil revenues. To cater to the increased demand, the group restarted a production line recently which will boost its Thailand’s capacity by c.20%. Furthermore, the weakening of THB against USD (YTD: -9.8%, see Figure #2) bodes well for the group as >90% of sales are priced in USD while c.70% of costs are priced in local currency. For Indonesia, demand from the local market remains robust as (i) the current elevated freight cost acts as a natural barrier for Indonesian furniture makers to import panel boards; and (ii) the group is gearing up its marketing efforts to the local market.

Outlook. Although Malaysia’s operations were closed for 2 months in 3Q21, we understand that the group was able to divert 60-70% of its MDF orders to its Thailand operations. As such, we expect Malaysia’s operations to remain in the red in 3Q, while this is well cushioned by its profitable Thailand and Indonesia operations. The group should see a meaningful recovery from 4Q21 onwards as operations normalize. Overall, we expect FY21 to be profitable, a turnaround from FY20 when it incurred losses. Furthermore, should the foreign labour intake restrictions be lifted, there is potential to scale up contribution from RTA going forward.

Forecast. Unchanged. With improving financials and no big capex spending anticipated, we are forecasting a DPS of 0.4sen for FY21 based on the group’s dividend policy payout ratio of 25% from net profit.

BUY, TP: RM0.65. We switch our valuation methodology to P/E (from P/B) following the group’s successful turnaround and its improving earnings prospects. As such, our TP is adjusted slightly to RM0.65 (from RM0.67 previously) based on 12x P/E of FY22 EPS of 5.4 sen. Our P/E ratio is slightly above its historical 3-year average PE of 11.6x from FY15-FY17 when the group was profitable. We continue to like Evergreen as we believe the group’s well spread production bases in Malaysia, Thailand and Indonesia allows the group to mitigate risks that affect a particular country (as witnessed by its ability to divert orders from Malaysia to Thailand during the recent lockdown). Furthermore, the group’s integrated operations from upstream products (MDF, particleboards, glue) to downstream products (value-added boards and RTA) allows the group to (i) have better cost control (as some of the raw materials for downstream products are produced internally); and (ii) have better understanding on the market dynamics and customer behaviour. With sustained strong MDF export demand and ASP, strong furniture demand as well as the group’s improvement in production efficiency, we believe that Evergreen is on course to chart a new growth path going into FY22.

Source: Hong Leong Investment Bank Research - 9 Nov 2021