EVERGRN: Is the worst over?

Rebound in sight? Wood manufacturing companies, including EVERGRN and HOMERIZ under HLIB’s coverage, concluded FY23 on a negative note, a trend that may persist into FY24 amid lingering concerns of weak furniture sales in the US, which accounts for a crucial ~49% of Malaysia's wood furniture exports. Notably, one of the primary factors that contributed to the significant decline in Malaysian furniture exports to the US in 2023 was the unaffordable housing market stemming from the Fed's interest rate hikes. However, with potential Fed’s pivot in 2H24, there appears to be a glimmer of hope for wood manufacturing counters.

Bloomberg’s consensus forecasts indicate a 2.2% growth in US housing starts to 1,424k for 2024, with new home sales projected to increase to 688k. This recovery trend is expected to gain further traction in 2025-2026 (Figure#1). The improvement in housing statistics projections in the US suggests that the worst may be over for our wood manufacturing companies, and they could be on the brink of an earnings rebound. Hence, we believe the risk-and-reward proposition for EVERGRN is becoming attractive, with near-term challenges already priced in and a potential rebound on the horizon.

Multiple strategies to mitigate operational challenges. During this challenging period, management is actively addressing various difficulties through strategic initiatives, including (i) exploring new markets by exporting RTA products to Japan as an alternative to the US market, (ii) conducting operational restructuring by relocating key MDF production lines from Malaysia to Indonesia, capitalizing on Indonesia's competitive advantages in raw materials, labour, and electricity costs, (iii) streamlining existing operations for enhanced efficiency, and (iv) optimizing output by collaborating with subcontractors. We believe these measures will further strengthen the recovery trend of the group’s earnings once the US market rebounds.

Building a base. Technically, EVERGRN is building a base at the long-term support region of RM0.28-0.30, accompanied by heightened trading volume compared to the 20-day average. A decisive breakout above the RM0.305 resistance level is likely to propel the price towards the RM0.32-0.35-0.37 range. 

Collection range: RM0.275-0.280-0.295

Upside targets: RM0.320-0.350-0.370

Cut loss: RM0.265
 

Source: Hong Leong Investment Bank Research - 25 Mar 2024