We  are  ceasing  coverage  on  EVF  amid  limited  near-term  upside catalysts.  Persistently  high log  prices  and weak MDF  sales and selling prices  have  led  to  the  company  posting  losses  over  the  past  two quarters. We see MDF prices remaining muted due to rising capacity in other Asean countries.  With  the global  economy  remaining  feeble,  this rising supply is unlikely to  be matched by improving demand. Our last call was a NEUTRAL, with a FV of MYR0.58.

- Seeing  red.  Evergreen  Fibreboard  (EVF)  has  been  recording  losses  in  the past two quarters, sinking deeper into the red in 1QFY13 with a  net loss  of  MYR17.5m  from  a  MYR4.6m  net  loss  in  4QFY12.  Persistently high  log  and  glue  prices  as  well  as  increased  shipping  cost  have  kept expenses  elevated,  while  declining  sales  volume  and  selling  prices  for the  company’s  medium  density  fibreboards  (MDF)  have  dampened revenue. As a result, EBIT margins have shrunk by 8.1ppt from 12.3% in FY10 to 4.2% in FY12. The company’s earnings have fallen for 2 straight years and is now heading for the 3rd year of decline.  

- Tepid  demand  and intensifying  competition. We believe MDF  prices will likely remain muted in the near term due to rising production capacity in  Thailand,  Vietnam  and  Indonesia.  As  demand  is  expected  to  stay sluggish amid economic weakness in the Eurozone and subdued growth elsewhere  around  the  world,  the  increased  production  capacity  is unlikely to be matched by improving demand. In view of its weak pricing power,  EVF  aims  to  return  to  profitability  by  cutting  production  cost  but there is lack of clarity on how this will be carried out.

- Ceasing coverage. While other Malaysian timber companies should see profits  from  their  logs  divisions  compensating  for  the  losses  in  the plywood  segment,  EVF  -  being  a  pure  MDF  manufacturer  with  no upstream assets - will be plagued by persistently high log costs and tepid MDF  selling  prices.  Given  the  limited  upside  catalysts  in  the  near  to medium  term,  we  are  discontinuing coverage  on  the  company.  Our  last call  was  a  NEUTRAL,  with  a  FV  of  MYR0.58,  based  on  a  12.0x  FY14 P/E. 

Source: RHB