Evergreen is facing some near term headwinds mainly caused by prolonged bad weather as well as global macro events. We are not overly concerned on this as these challenges are not structural or permanent in nature. We believe Evergreen is well positioned to overcome these challenges due to its well-integrated operations as well as its diversified production bases. Overall, the group is still riding on a positive momentum driven by recovering demand in the panel board and furniture market. Maintain BUY with an unchanged TP of RM0.94 based on 12x P/E of FY22 EPS of 7.8 sen.

We Hosted a Virtual Meeting With Evergreen Recently With the Following Key Takeaways:

Strategizing for near term headwinds. Management shared that there has been some tightness in log supply in Malaysia due to the longer than usual wet season since end of 2021 which caused 2 major floods. To combat this, Evergreen has diversified into using mixed tropical wood and wood chips instead of solely using rubber wood to help alleviate the shortage in rubber wood log supply. This has helped Evergreen to maintain near full utilization of its particleboard (PB) and ready-to-assemble (RTA) plants except for the medium density fibreboard (MDF) plant (due to log supply shortage). On the cost side, log and glue cost remains flattish in 1QFY22 on a QoQ basis but glue cost has seen an increase recently due to the protracted Russia-Ukraine war which lifted crude oil price. Nonetheless, with its own glue plant, the group is able to (i) adjust the composition of raw materials used in glue production (i.e. reducing the component that is higher priced) and; (ii) adjust its glue formulation to improve glue efficiency in the production of panelboards.

Installing solar panels to manage electricity cost. Evergreen is also in the midst of installing solar panels across 3 of its major Malaysian plants with the following targeted installation timeline: Batu Pahat plant (mid 2022); Segamat and Nilai plants (2Q 2023). The structure for the installation of these solar panels is “zero capex” whereby Evergreen does not incur any cash outflows. The installation and maintenance costs are entirely borne by the solar panel operators. Evergreen only pays a fixed tariff for the next 25 years at a rate which is substantially lower than TNB’s standard tariff, thus resulting in cost savings for the company.

ASP still on an uptrend. Overall, ASP is still on a positive trend albeit growing at a slower pace because of higher transport costs as a result of elevated oil price. Container shortage still remains and is further exacerbated by the Russia-Ukraine war as well as the recent re-imposition of lockdowns in China. Although Evergreen sells on a FOB basis, ASP is still slightly impacted due to reduced purchasing power from customers arising from higher transport cost. Despite that, the overall panel board demand and ASP growth still remains robust, supported by (i) strong demand from US furniture buyers as WFH trend continues, which drives demand for the MDF and RTA segments in Malaysia; (ii) continued strong export demand from Middle East in its Thailand segment due to the economic recovery as a result of higher oil revenue, bolstering stronger consumer spending in furniture and; (iii) the sustained strong demand in Indonesia due to the rapid development in Indonesia’s furniture market as a result of the rise in its middle class.

Outlook. With ASPs continuing to rise while raw material costs remaining flattish in 1QFY22 vs. 4QFY21, Evergreen is likely to record commendable results in 1QFY22 comparable to the previous quarter. Nonetheless, Evergreen may see some weakness in 2QFY22 due to the Raya holidays and plant maintenance resulting in lower operating days. The company will use this downtime to perform plant maintenance and build-up wood stock. Management anticipates challenges to be well managed as they are not structural or permanent in nature. Overall, with ASP recovering from the lows of previous years and with its well managed integrated production and improving efficiencies, we believe the group will deliver sustained earnings growth going forward.

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. We continue to like Evergreen as 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. Its well integrated business segments, diversified production bases across three countries (Malaysia, Thailand and Indonesia) also allow the group to manage well on its near term challenges. Besides, the current USD strength (MYR/USD rate: RM4.35/USD) should also benefit the group as more than 50% of its revenue is denominated in USD while costs are mainly in local currencies. Finally, its strong operating cash flow coupled with no major capex in sight indicates there is potential for the group to pay out higher dividends going forward.

Source: Hong Leong Investment Bank Research - 6 May 2022