This article first appeared in The Edge Financial Daily on May 4, 2017

Evergreen Fibreboard Bhd
(May 3, 89 sen)
Maintain buy with an unchanged target price (TP) of RM1.20: We reiterate our positive view on Evergreen Fibreboard Bhd following our recent meeting with its management.

Taking cues from the adverse weather condition (which has resulted in a log supply shortage, hence higher log cost) and glue cost (arising from higher crude oil prices), we opine that its first-quarter of 2017 (1QFY17) earnings performance (due out in end-May) will come in weaker (both year-on-year and quarter-on-quarter).

But we see a better second half of 2017 (2H17). Despite having anticipated a weak set of 1QFY17 results, we remain positive on Evergreen’s earnings fundamentals, underpinned by: i) Evergreen’s move to diversify into tropical wood-based products; and ii) commencement of operations of the new particle board line and an additional ready-to-assemble furniture line. Besides, we opine that higher overall production capacity (from 2H17) will result in higher glue usage, hence resulting in improved economies of scale at its glue plant.

Evergreen is slowly diverting its dependency on rubberwood and moving to tropical mixed wood (TMW) which costs an additional RM10 per tonne compared with rubberwood. TMW is fungus-resistant, which translates into a 20% higher selling price.

The new particle board production facility in Segamat (which has a capacity of 20,000m³ per month) will start contributing to Evergreen from July 2017.

We are convinced that the capacity of Evergreen’s new particle board line can be easily taken up, due to the particle board shortage locally (as local furniture manufacturers, which are the main consumers of particle boards, are currently importing particle boards from neighbouring countries). Risks include escalating raw material and labour costs, weaker-than-expected demand and selling prices of medium-density fibreboards, and an earlier-than-expected strengthening of the ringgit (against the US dollar).

We believe the higher raw material cost will be mitigated by: 1) commissioning of the new particle board line; 2) higher operational efficiency which in turn converts into a stronger bottom line; and 3) the prevailing exchange rate of RM4.33 per US dollar is still in exporters’ favour.

We maintain our “buy” recommendation with an unchanged TP of RM1.20 (based on an unchanged 11 times financial year 2017 core earnings per share of 10.7 sen). — Hong Leong Investment Bank Research, May 3