The strong rebound in 4QFY21 earnings and associated run-up in share price (+47.1% YTD) have reignited investors' interest on the stock. The group’s recalibration of its production process over the past several years has started to pay off resulting in greater efficiency and lower cost of production which allows it to be well positioned to capitalize on the current upcycle in the panel boards market. We continue to like Evergreen for its integrated business segments, diversified production bases across three countries (Malaysia, Thailand and Indonesia) and broadening export markets. With more than 50% of revenue denominated in USD while cost are mainly in local currencies, Evergreen offers a good proxy for export play. Maintain our high conviction BUY call with an unchanged TP of RM0.94 based on 12x P/E of FY22 EPS 7.8 sen.

FY21 results recap. Despite the longer shutdown period in Malaysia operations of c.4 months (vs. c.2 months SPLY), FY21 did much better than FY20, with a core net profit of RM27.8m (vs. -RM26.1m SPLY). The improvement was largely attributed to GP margin expansion to 20.6% (from 14.7% SPLY) arising from (i) the uptrend in ASP which more than offset the raw material cost increase; and (ii) improvement in productivity from its process reengineering. Besides, we also highlight the group’s balance sheet improvement and strength: (i) its net gearing improved to 7.1% in FY21 (compared to 11.2% SPLY); and (ii) net asset per share stands at RM1.23 per share, which is higher than its current share price.

Vertically integrated business segments – a competitive strength. The group has come a long way and transformed itself from a medium density fibreboard (MDF) producer (when it was listed in 2005) to an integrated player with three key business segments, i.e. MDF, particleboards (PB) and ready-to-assemble (RTA) furniture. Besides, the group has its own glue plants in two locations, i.e. in Gurun, Kedah and Batu Pahat, Johor, with production capacity of 96k MT for each plant, which allows it to ensure continuity in supply, faster time to market and better cost management. Its venture into downstream production in RTA and value-added boards on the other hand, allows the group to tap into the furniture market which enjoys a higher profit margin.

Regional production base helps to mitigate risks. The group has three production bases for MDF which mitigated supply disruption and ensured continuity in exports during the production halt in Malaysia last year (see Figure #1 for a breakdown of the production capacity). For its Thailand production, the group continues to see strong export demand from the Middle East supported by a pickup in consumer spending on furniture in the region. The current elevated crude oil prices (>USD100/bbl) should further spur private consumption as more job opportunities will be created as a result of increased government spending from higher oil revenues. Meanwhile, the less developed processed wood manufacturing in Indonesia enables the group to market MDF in Indonesia with sales denominated in USD while cost is in local currency, giving it superior profit margin. Note that Indonesia has the highest PBT margin among all 3 regions. Its competitiveness in Indonesia is further enhanced by its own operated jetty (production based in Palembang, Sumatra) which facilitates sales to other parts of Indonesia.

Home base advantage in Malaysia. Back in Malaysia, Evergreen is enjoying a home base advantage as it supplies bulk of its MDF and PB to the furniture producers in Muar. The proximity of its factories to the Muar furniture producers, coupled with rising transport cost associated with elevated crude oil prices enhance its competitiveness against Thailand producers (which were the main suppliers to Muar previously). Furthermore, local demand for its MDF and PB remain strong as local furniture producers scale up production to catch up on backlog orders from the production halt previously as well as the continued healthy inflow of furniture orders especially from the US market. The combination of a natural barrier to import boards as a result of high logistic cost and the continued robust demand from local furniture makers will continue to provide support for its rising ASP.

Demand will remain strong. We believe the demand for Evergreen’s products MDF, PB and RTA will remain well supported due to the following reasons. Its MDF and PB will continue to enjoy the strong demand from Malaysian furniture makers due to the trade diversion from China to the SEA region amidst US-China trade friction. Likewise, this will also benefit its RTA segment. Besides, the WFH trend that bolsters the home office furniture demand in US (Malaysia’s largest furniture export market comprising >60% export value) is also likely here to stay as many prefer to WFH now due to the flexibility, cost and time saving as well as a better work-life balance. Finally, the rising trend in buying furniture online has led to the rise in popularity for light-weight or RTA furniture that are easier and cheaper to deliver. These light weight and RTA furniture are typically made from MDF or PB, thus, supporting the demand for its PB, MDF and RTA segments.

Well positioned to manage challenges. The key challenge the group faces lies in the tight log supply exacerbated by the prolonged monsoon season and flood. The group leverages on its past log concession experience and relationship to mitigate log wood supply tightness in times of monsoon. Its Indonesia and Thailand segments, on the other hand, continue to enjoy lower log cost compared to Malaysia. While the glue cost has eased substantially from its peak in Dec 2021, there is a risk that the cost may increase again in view of the current high crude oil prices. The group’s in-house glue plants allow the group to formulate and optimise glue composition to improve its glue consumption ratio for its processed wood, which should help to mitigate the rising glue cost risk. Finally, labour management is also a key challenge. The group has automated most of its production processes in its processed wood of MDF and PB. The exception lies in RTA given customised orders and requirement of labour for packaging. With the authority in the midst of relaxing intake of foreign workers, this will enhance its potential to produce more RTAs for sales.

Forecasts. Unchanged.

Maintain our high conviction BUY call with an unchanged TP of RM0.94 based on 12x P/E of FY22 EPS 7.8 sen. The strong rebound in 4QFY21 earnings and associated run up in share prices (+47.1% YTD) have reignited investors' interest on the stock. The group’s recalibration of its production process over the past several years has started to pay off resulting in greater efficiency and lower cost of production which allows the group to be well positioned to capitalize on the current upcycle in the panel boards market. We continue to like the group for its integrated business segments, diversified production bases across three countries (Malaysia, Thailand and Indonesia) and broadening export markets. The group, with more than 50% of revenue denominated in USD while cost mainly in local currencies, offers a good proxy for export play.

Source: Hong Leong Investment Bank Research - 28 Mar 2022