ASEAN’s largest MDF producer. Evergreen Fibreboard Bhd (EVERGRN) is involved in the production of medium density fibreboards (MDF), particleboards (PB) and ready-to-assemble (RTA) furniture. With the current annual production output of MDF exceeding 1.3 million m3, EVERGRN stands as the largest manufacturer of such wood-based products with furniture and housing applications in ASEAN. Its manufacturing facilities are located within Malaysia, Thailand and Indonesia.

Worldwide network of customers with close to home support. On top of catering to >60% of Malaysia’s MDF market, EVERGRN services a client base spanning over 40 countries, primarily in the South East Asian and Middle Eastern regions. With a predominantly export-base portfolio, c.70% of EVERGRN’s sales are transacted in USD. While there are some concerns on the fluctuation of the prevailing USD/MYR rates, the company mitigates its forex risk exposure by hedging most of its material USD denominated contracts. Complementing its home base and regional production plants, EVERGRN sources raw materials within its regional suppliers in Thailand and Indonesia with domestic support from its rubber plantation estate in Johor, ensuring easily assessable and readily available supply of raw materials without reliance on imports

Prior years’ performance was heavily undermined by external factors, where expansionary endeavours by EVERGRN were met with a severely weakened demand, particularly in the Middle Eastern market as a result of civil unrest there. The struggle to clear stocks resulted in the company reducing selling prices, which was further dampened by increasing logistics and raw materials costs that compressed margins. FY13 and FY14 generated sales of RM938.7m (-9.0% YoY) and RM942.0m (+0.4% YoY) with a gross profit (GP) of RM127.5m and RM166.6m, respectively. Compared to FY08-FY11 historical average GP margin at 23.5%, FY13 saw the sharpest decline with 13.6% GP margin with improvement seen later in FY14 at 17.7% as the global market began to normalise. Ultimately, FY13 ended with a LATAMI of RM45.1m and FY14 with a PATAMI of RM0.2m.

Streamlining initiatives has successfully turned EVERGRN around in FY15 as refurbishments and upgrades on existing facilities, coupled by investments in highly automated machinery improved production levels while reducing overhead and labour costs. In FY15, with higher revenue registered at RM1.01b (+7.7% YoY) coupled with higher operational efficiency, GP soared by leaps and bounds (+77.8%, with GPM improved to 29.2% from 17.7%) to close at RM296.3m, sending PATAMI to RM92.6m (from FY14 PATAMI RM0.2m). · Looking for even better years ahead. Management believes that EVERGRN is able to improve earnings further with the stabilisation of the MDF market and new strategies in place to expand the company’s customer base in the RTA segment, which yields more favourable margins. Management aims to further explore opportunities to widen its streamlining efforts to bring about continuous growth in earnings potential. In addition, a minimum dividend payout policy of 25% was enforced from FY16 onwards, having not paid any in the last two years in lieu of disappointing results.

Not rated with a fair value of RM1.22, ascribing at PER of 8.5x (inline with FBM Small Cap’s FY17E PER), with our FYE17 EPS of 14.5 sen. Our initial projection expects a steady revenue growth in FY16E/FY17E of 7.6%/5.9% with sustainable GP margin of 32.1%/33.7%, and with a 13.2%/17.5% growth in net earnings growth. Applying the minimum dividend payout of 25% of NP, FY6E/FY17E is poised to provide investors 3.5 sen/4.0 sen or 3.2%/3.7% dividend yield. Although the growth prospects of EVERGRN appear promising, we are conservative with our valuation due to the prevailing forex risks and the prolonged unrest in the Middle East which contributes c.45% of the company’s revenue (based on FY15 results). In addition, EVERGRN appears expensive PER-wise with a lower dividend yield against fellow MDF peer, Heveaboard.

Source: Kenanga Research - 13 Apr 2016