A recent update with management suggests that our earlier earnings forecasts appear conservative given a stronger USD and the expectedhigher cost savings. We lift our earnings estimates after revising our assumptions but downgrade our call to NEUTRAL with a revised TP of MYR2.00 (5% upside), as we believe most of the positives have been priced in. We switch our valuation to 1-year forward P/E from P/BV.

Share price up 160% since Jan 2015. Evergreen Fibreboard’s (EFB) share price soared following its earnings turnaround on the back of positive external factors. EFB enjoys net positive impact from a stronger USD given about 70% of its sales and 30% of its production cost are denominated in the USD. The weaker crude oil price environment is also in favour of EFB due to lower transportation expenses and glue cost.

Moving forward. We expect the reduction in labour cost and electricity consumption arising from its upgraded Batu Pahat plant coupled with the discontinuation of its loss-making Masai plant to contribute positively to its bottomline from 3Q15 onwards. New capacities for higher -margin products are targeted to come on-stream from mid-FY16 onwards.

Earnings revisions and risks. Given the recent currency movements, we revise our USD/MYR assumptions for FY15F/FY16F to MYR3.75/MYR3.69 (from MYR3.64/MYR3.60). We also factor in new production capacities and greater cost savings from its turnaround exercises. As a result, we raise our FY15-17 earnings forecasts by 58.2%/47.6%/53.8% respectively. Key downside risks include unfavourable forex movements, a spike in raw material costs and lowerthan-expected demand.

Valuation. We switch our valuation method to 1-year forward P/E from P/BV, as we believe that EFB’s fundamentals have structurally improved and its earnings will likely be sustainable.

Higher TP of MYR2.00; downgrade to NEUTRAL. We lift our TP to MYR2.00 (from MYR1.50, 5% upside) based on a 10x multiple to its FY16F earnings. We downgrade our recommendation to NEUTRAL(from Buy) as we believe that most of the positive news has been priced in. The stock currently trades at 12x FY15F P/E.

Valuation Adopting 1-year forward P/E multiple. We switch our valuation to 1-year forward P/E from P/BV, as we believe that the group’s fundamentals have structurally improved and its earnings profile is likely to be sustainable. While external factors like the strengthening of the USD against the MYR and lower raw material costs have worked in EFB’s favour since 3Q14, we believe the group’s future earnings growth will likely be underpinned by its internal restructuring activities.

EFB’s Batu Pahat medium density fibreboard (MDF) line has been fully upgraded in June, while its loss-making Masai plant has been shut down in May and the refurbished MDF production line will be relocated to Batu Pahat plant by end -2015. We expect the reduction in labour cost and electricity consumption as well as the discontinuation of the loss-making operation to contribute positively to the group’s bottomline from 3Q15 onwards. In addition, new capacities for the higher-margin premium particle board (PB) and ready-to-assemble (RTA) furniture are targeted to come on-stream in FY17.

Higher TP of MYR2.00; downgrade to NEUTRAL. A recent update with management suggests that our earlier earnings forecasts appear to be conservative given a stronger-than-expected USD/MYR and expectations of higher cost savings arising from its streamlined operations. Following our forecast revisions, we lift our TP to MYR2.00 (from MYR1.50, 5% upside), pegged to FY16F P/E of 10x. This multiple is above its average 5-year trading band of 8.3x before its bottomline dipped into the red in FY13 (see Figure 1). We deem this valuation multiple fair considering that we have yet to take into consideration any potential gains from the impending disposal of its non-core or idle assets, which is part of its restructuring programme. In addition, it implies a 33% discount to its close competitor Vanachai Group PLC’s (VNG TB, NR) FY16F P/E of 14.9x. Historically, the discount has been at about 32%.We downgrade our recommendation to NEUTRAL as we believe that most of the positive news has been priced in. The share price has rallied 160% since Jan 2015and the stock currently trades at 12.0x FY15F earnings. However, we expect its P/E multiple to ease further to 10.0x and 8.8x in FY16 and FY17 respectively on the back of potential earnings expansion.

Earnings forecasts Revising forecasts. We tweak our revenue estimates by incorporating the recent MYR weakness and adjusting the timeline of the commissioning/resumption of new/old capacities respectively. Also, we lower our operating expense (opex) forecasts to reflect greater cost savings from better operational efficiency. As a result, our FY15-17 earnings forecasts are revised upwards by 58.2%/47.6%/53.8%respectively (see Figure 3).

Key assumptions. Our key assumptions are as per Figure 4. We revise up our average USD/MYR assumptions for FY15F/FY16F to MYR3.75/MYR3.69 (from MYR3.64/MYR3.60) but maintain FY17F assumption at MYR3.60. We also adjust the utilisation rates of its production activities after getting guidance from management on the targeted commercial operation timeline for upgraded machinery and new capacities.

Key risks Unfavourable forex movements. EFB enjoys net positive impact from a stronger USD given that about 70% of its sales and 30% of its production cost are denominated in the USD. That said, any reversal trend in forex movements could negatively impact its bottomline. We estimate that a 1% decline in USD/MYR rates could reduce our earnings forecasts by 4.0-4.6%.

Spike in raw material costs. Key raw materials such as log and glue constitute about 55-65% of EFB’s MDF production cost. We estimate that every 1% increase in log and glue costs could translate into a 3.5-3.9% reducton in our earnings forecasts. The current rubber wood log price is trading at about 40% below the peak levels and has been steadily trending downwards due to amply supply from weak latex prices. On the other hand, glue cost hs been benefitting from softer crude oil prices as the main raw materials for glue are urea and methanol. In the event of a sudden spike in raw material costs, we believe the higher production cost is likely to be mitigated by greater automation and operational efficiency to reduce wastage and increase productivity.

Softer-than-expected demand. The demand for MDF and PB is mainly driven by economic growth, home building and improvement activities. Most of EFB’s MDF is exported to Middle East and South-East Asian regions, which collectively made up of about 80% of its FY14 revenue. We expect the demand for MDF and PB products will likely be supported by continued developments of property and hospitality sectors in these regions. In the event of a significant economic slowdown in these two economies, EFB’s sales will be negatively impacted. However, we regard the group’s efforts to streamline its MDF production line instead of capacity expansion to increase productivity as a positive. We also like its efforts in diversifying into higher premium products such as RTA furniture in order to reduce its reliance on lower margin raw boards.