We  have  received  clarification  from  the  management  of  EFB  on  the disposal of its wholly-owned subsidiary  EHR and  the  provision of  bad debts  worth  MYR2.3m.  We  are  upbeat  on  this  development  as  it  has removed  the  potential  risk of  a  loss  in  a  lawsuit that could  have  cost over  MYR21.7m.  Maintained  BUY  with  an  unchanged  TP  of  MYR1.11(23%  upside),  derived  from  applying  a  0.7x  P/BV  to  FY15F  BV  of MYR1.59.

The disposal.  On 29 Jan, Evergreen Fibreboard  (EFB) announced that it  disposed  of  its wholly-owned subsidiary,  Evergreen Heave Resources SB (EHR), to Muhammad Syafiq bin Zainal and Nurul Azleen bint i Zainal for RM10.0.  EHR is EFB’s arm to source for logs  and is neither  active in its business operation nor a key contributor to its profitability.

No  longer  plagued  by  lawsuit.  The  disposal  marked  the  end  of  the lawsuit  filed  by  Naza  Industries  SB  (Naza)  on  17  Apr  2014.  To  r ecap, Naza  claimed  that  EHR  breached  the  chip  logs  sales  and  purchase agreement  dated  12  Mar  2012  for  failing  to  harvest,  purchase,  take delivery and pay for chip logs of 300,000 metric tons (MT) at a fixed price of  MYR95/MT  from  Naza  within  30  months  from  the  date  of  the agreement. Naza is claiming for losses of over MYR21.7m from EHR. As the  disposal  came  into  effect  on  29  Jan  2015,  it  has  removed  the uncertainties of a potential risk of a lawsuit for EFB.

Provision  of  MYR2.3m.  EHR  initially  committed  a  security  deposit  of MYR3.0m under the agreement with Naza. Hence, upon the disposal of EHR, EFB would  recognize a provision on doubtful bad debts of about MYR2.3m in FY15.

Maintain BUY with a MYR1.11  TP. We are upbeat on the development as it removes the potential risk of a loss stemming from  the lawsuit that could  have  cost >MYR21.7m in  claims. We remain positive  on EFB  as we  believe  the  company  could  turn  around  this  year  –  premised  on improved  internal efficiency, favourable forex  rates  and relatively stable raw  material  costs.  Maintain  BUY  with  an  unchanged  TP  of  MYR1.11, derived from applying a 0.7x P/BV to its FY15F BV of MYR1.59.

Source: RHB