Evergreen recorded commendable 3Q21 results as vast improvement in regional operations mitigated the losses from Malaysia’s operations due to 2 months production halt. In 4Q21, most factories were running at full capacity except for one plant which was under-utilized due to tight log supply as a result of flood. Raw material costs (rubber wood and glue) registered an increase in 4Q21. The group had submitted application for foreign labour intake and this should provide upside to its RTA segment. Overall, despite near term challenges, we believe the group’s earnings growth is gaining momentum supported by the robust panel boards and furniture market. Maintain BUY with an unchanged TP of RM0.67 based on 12x FY22 EPS of 5.6 sen.

Vast improvement in regional contributions in 3Q21. To recap, Evergreen recorded 3Q21 core net profit of RM2.6m (QoQ: -2.3%; YoY: +3.4%), which brought 9M21’s sum to RM12.8m, a turnaround from -RM20.1m SPLY. Notably, its regional operations recorded vast improvements which helped to mitigate the loss from its Malaysia operations (arising from a 2-month production halt). Thailand recorded PBT of RM15.7m (+2.7x QoQ; 3Q20: -RM2.4m), while Indonesia recorded PBT of RM4.8m (+1.1x QoQ; +1.5x YoY). The improvement in Thailand operation was due to (i) rising MDF ASP; (ii) improved export demand from Middle East market; and (iii) partial MDF order diversion from Malaysia (amid production halt). Indonesia improvement was on the back of stronger sales to the local market, which provides more attractive margin compared to the export market.

Operations normalised while cost increased in 4Q21. In 4Q, Evergreen’s factories (except for one plant, as flood resulted in rubber wood shortage) were running at full capacity and the group has rebuilt its order book to a healthy level. We understand that rubber wood costs have increased across all 3 operating countries (with Malaysia operations experienced a more pronounced increase on the back of flood and rainy season), while glue prices have increased by >30% (as increased fertiliser usage in oil palm plantations have resulted in higher urea prices). Nonetheless, we gathered that there are signs that glue cost may have peaked and may start easing from Feb 2022. We understand that the group will continue to negotiate its products' pricing with its customers in view of the steep increase in material costs.

Easing of labour intake will provide further upside to RTA segment. Evergreen had submitted an application in Dec 2021 to bring in additional foreign workers mainly to its RTA segment. While there is no indication on when the foreign workers can come in, the arrival of additional workers (once materialised) is expected to add c.30% capacity to its RTA segment which will in turn allow Evergreen to produce higher margin products that is more labour intensive. Separately, Evergreen is not overly concerned on the recent forced labour issues impacting the manufacturing sector as Evergreen complies with all the rules and regulations, including ILO requirements. Besides, we understand that Evergreen’s export customers conduct on-site audit from time to time to inspect the working conditions and worker’s hostels as well as to perform interview with the labours.

Outlook. Despite the capacity under-utilization, cost increase and seasonally weaker quarter for 4Q21 (due to rainy season), we believe that the group is still on a positive earnings growth trajectory as the robust demand and rising ASP in panel boards and furniture market will outweigh these near term challenges. We expect that rubber wood cost and supply will start normalising once weather condition improves and glue cost may start easing from Feb onwards. In addition, the foreign labour intake should provide further upside to its RTA segment. With the expected turn around in its Malaysia segment in 4Q21 and sustained positive contributions from its regional operations (supported by reasons highlighted above), we believe Evergreen is on track to deliver commendable results in 4Q21, with earnings growth momentum sustaining in to FY22.

Forecast. Unchanged.

Maintain BUY with an unchanged TP of RM0.67 based on 12x P/E of FY22 EPS 5.6 sen. We continue to like Evergreen as the group’s integrated operations from upstream to downstream products allows it to be better positioned to ride on the current upcycle in the panel boards market as well as the growth in the furniture industry. Furthermore, its well diversified 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).

Source: Hong Leong Investment Bank Research - 13 Jan 2022