1Q22 core net profit of RM16.8m was within our expectation, making up 25% of our FY21 forecast of RM67.2m. Despite near term headwinds in the global macro environment, we opine that Evergreen’s well-integrated business segments as well as its diversified production bases across 3 countries would enable the group to weather through these uncertainties. Maintain BUY with a slightly higher TP of RM0.95 based on 12x P/E of FY22 EPS of 7.9 sen. Moreover, its strong operating cash flow coupled with no major capex in sight indicates that there is potential for the group to pay out higher dividends going forward.

Within expectations. Evergreen recorded 1Q22 core net profit of RM16.8m (QoQ: +12.1%; YoY: +1.2x) which came within expectations and made up 25% of our FY22 forecast of RM67.2m. 1Q22 core net profit was arrived at after adjusting for (i) receivables write-off (RM60k); (ii) gain on disposal of PPE (RM22k); (iii) Impairment of assets (RM1.0m) and; (iv) forex gain (RM1.8m).

Dividend. Declared final dividend of 1.5 sen/share in respect of FY21, ex-date to be announced later.

QoQ. Revenue increased by +11.2% mainly contributed by Thailand (+48.7%) but partially offset by Malaysia (-11.3%) and Indonesia (-21.9%). The increase in revenue from Thailand was primarily due to shipment of deferred goods from 4Q21 as well as higher ASP and production volume. The decrease in revenue for Indonesia was due to a delay in shipment of goods but was partially mitigated by higher ASP whereas the decrease in revenue for Malaysia was due to lower production volume resulting in lower sales. This was caused by disruptions in log supply caused by shortage of foreign labour as well as the prolonged wet weather earlier this year. The lower production volume was similarly partially mitigated by higher ASP Consequently, core net profit increased by +12.1% driven by higher ASP despite higher raw material costs.

YoY. Revenue increased by +36.9% contributed by Thailand (+1.3x) and Indonesia (+0.7%) but offset by Malaysia (-5.3%). The increase in revenue from Thailand and Indonesia was due to higher ASP and sales volume. The decrease in Malaysia was due to lower sales volume of its panel boards despite higher ASP. Core net profit increased by a larger magnitude of +1.2x from RM7.5m to RM16.8m. This is due to higher GP margin of 24.8% (vs. 17.4% SPLY) as a result of higher ASP which more than offset the higher raw material costs.

Outlook. Evergreen’s 1Q22 results came in line with expectations, despite some issues faced in its Malaysia segment caused by shortage of foreign labour and prolonged wet weather earlier this year, as the group continues to benefit from continued ASP growth and sustained demand from all of its main sectors. However, we note that Evergreen might see a weaker 2Q22 due to near term headwinds such as (i) elevated raw material costs caused by the Russia-Ukraine war and inflationary pressures; (ii) lingering supply chain issues and; (iii) lower operating days due to the Raya holidays. The group will use the downtime to perform plant maintenance and build up its wood stock. However, we believe Evergreen will be able to overcome these issues as we reiterate that these near term headwinds are not structural or permanent in nature as well as the fact that the group has well -integrated business segments (Evergreen operates its own glue plant) and has a diversified base of operations in 3 countries (Malaysia, Thailand and Indonesia).

Forecast. Our FY22/23 forecasts increase slightly by 1.4%/1.1% post update of our model with FY21 audited accounts. We introduce FY24 forecasts.

Maintain our high conviction BUY call with a slightly higher TP of RM0.95 based on 12x P/E of adjusted FY22 EPS of 7.9 sen (from 7.8 sen). We remain positive on the group’s outlook in FY22 for the reasons mentioned above. Moreover, we believe Evergreen will continue to benefit from (i) the stronger USD to MYR exchange rate (2QTD: RM4.32/USD) as >70% of the group’s revenue is denominated in USD while costs are mainly in local currencies; (ii) continued strong export demand from the Middle East; (iii) potential capacity increase in the RTA segment from foreign labour intake and; (iv) increase in utilisation rate in Malaysia (as tight wood supply normalizes following the arrival of dryer weather). Moreover, its strong operating cash flow coupled with no major capex in sight indicates that there is potential for the group to pay out higher dividends going forward.

Source: Hong Leong Investment Bank Research - 24 May 2022