Evergreen Fibreboard Bhd    
(Jan 12, 78 sen)
Initiate coverage with a buy with a target price (TP) of RM1.11: We initiate coverage on Evergreen Fiberboard Bhd with a “buy” recommendation and a TP of RM1.11 (52% upside). We are valuing the stock based on price-to-book value (P/BV) by applying 0.7 times P/BV to its book value of RM1.59.

We expect Evergreen to turn around in financial year 2015 (FY15), propelled by operational efficiency, better selling prices, favourable foreign exchange (forex) and lower raw material prices. Currently, the company is still trading below its BV/per share of RM1.56 as at end-September 2014.

Evergreen Fibreboard is a prominent manufacturer of medium density fibreboard (MDF), particleboard, furniture, value-added wood-based products and resin. It has 10 plants located in Malaysia, Thailand and Indonesia with a combined annual production exceeding 1.3 million cu m.

Evergreen reported its first loss in FY13 with a net loss of RM42.8million, attributed to weak demand from its major market, new supply from other regional producers, an increase in logistics cost and a drop in average selling prices.

Currently, the company is embarking on a series of restructuring exercises in FY14 to FY16: (i) shifting one of the Malaysian production lines to its Indonesian plant to achieve economies of scale and greater cost savings; (ii) upgrade its machine and equipment in the Segamat plant, with more automation processes to improve efficiency and (iii) streamlining its Batu Pahat plant operations for better cost savings and smoother production flows.

With more than 70% of export sales, Evergreen is benefiting from a stronger US dollar. In addition, the company is also enjoying lower raw material costs, thanks to lower rubberwood logs and crude oil prices (both constituting 60% of its total cost).

We believe that the company will turn around in FY15, premised on improved efficiency internally, favourable forex and relatively stable raw material costs.

Our target price is derived by applying 0.7 times P/BV to its FY15 forecast BV of RM1.59. Evergreen currently trades at FY15 forecast P/BV of 0.46 and FY15 forecast price-earnings ratio of 10.4.

Key risks include: (i) fluctuation in the prices of raw materials; (ii) unfavourable forex movements and (iii) execution risk — restructuring is underway. — RHB Research, Jan 12

This article first appeared in The Edge Financial Daily, on January 13, 2015.