Evergreen’s 4Q22 core net loss of -RM17.7m (3Q22: RM15m; 4Q21: RM15m) brought FY22’s core net profit to RM30.1m (YoY: +8.3%). Results came in below our expectation, at 48.9% of full-year forecast. The negative variance was due to a decline in both sales volume as well as ASP of the group’s products. We cut our FY23/24 forecasts by -44.5% and -37.8% respectively in view of the results shortfall. While we expect Evergreen to remain profitable in FY23, the economic uncertainty ahead is clouding the group’s earnings visibility and furniture demand. For these reasons, we downgrade to HOLD with a lower TP of RM0.33 pegged to 8x P/E on FY23 EPS of 4.1 sen.

Below expectation. Evergreen’s 4Q22 core net loss of -RM17.7m (3Q22: RM15m; 4Q21: RM15m) brought FY22’s core net profit to RM30.1m (YoY: +8.3%). Results came in well below our expectation, at 48.9% of full-year forecast. The negative variance was due to a decline in both sales volume as well as ASP. FY22 core net profit number was arrived at after adjusting for EIs consisting of gain on disposal of PPE, impairment of assets and inventories, goodwill written off, loss on disposal of subsidiary and forex income amounting to RM54.3m.

Dividend. None (4Q21: none). FY22: none (FY21: 1.5 sen).

QoQ. Revenue decreased by -24.2% due to declines in all 3 regions: Malaysia (- 10.3%), Thailand (-42.1%) and Indonesia (-16.8%). The declines in all 3 regions were largely due to lower ASP and sales volume. Consequently, the group recorded a core net loss of -RM17.7m (vs. RM15m in 3Q22) due to operating leverage effect.

YoY. Revenue decreased by -33.1% due to declines by all 3 regions: Malaysia (- 31.5%), Thailand (-48.6%) and Indonesia (-5.9%), due to the same reasons as mentioned in the QoQ paragraph. The group recorded a core net loss of -RM17.7m (vs. RM15m SPLY) due to GP margin compression to 5.7% (from 22.7% SPLY), caused by the increase in raw material cost.

YTD. Revenue increased by +17.2% contributed by Malaysia (+12.9%), Thailand (+22.4%) and Indonesia (+14.2%) largely due to higher ASP. However, core net profit increased by a lower margin of 8.5% due to higher taxation.

Outlook. Despite excluding one-off non-cash EIs, Evergreen still missed the mark for FY22 due to declining ASPs and sales volume, caused by a sharp decline in demand for furniture as the Fed continued on increasing interest rates, causing a slowdown in US home sales. As for the group’s FY23 prospects, there is some optimism that an upcoming furniture fair in the Middle East in March would give a boost to furniture demand as furniture distributors look to replenish inventory . However, we opine that should inflation in the US continue to run hotter than expected, the Fed would have to continue hiking interest rates and stay higher for longer, thus continuing to negatively impact housing sales and in consequently furniture demand.

Forecast. We cut our FY23/24 forecasts by -44.5%/-37.8% to account for uncertain furniture demand ahead.

Downgrade to HOLD (from Buy) with a lower TP of RM0.33 (from RM0.58) pegged to 8x P/E on FY23 EPS of 4.1 sen. While we expect Evergreen to remain profitable in FY23, the economic uncertainty ahead is clouding the group’s earnings visibility and furniture demand. Nonetheless, we believe that Evergreen’s initiatives in enhancing competitiveness by moving MDF production lines to Indonesia (with the country’s ready supply of logs and labour) during this time will place the group ahead of its competitors in enticing demand in the long term.

Source: Hong Leong Investment Bank Research - 28 Feb 2023