This article first appeared in The Edge Financial Daily on May 9, 2019
Evergreen Fibreboard Bhd
(May 8, 36.5 sen)
Maintain hold with a lower target price of 37 sen: Evergreen Fibreboard’s Indonesia subsidiary (51% ownership) PT Hijau Lestari Raya Fibrebaord (PT Hijau) had on April 16, 2019 been served with a writ of summons and statement of claim by PT Hutrindo Jaya Fibreboard Manufacturing and PT Uforin Pranjen Adhesiv Industry (both in total own the remaining 49% in PT Hijau). Both the plaintiffs wish to claim for material losses of 133 billion Indonesian rupiah (RM39 million) and immaterial losses of one trillion rupiah. The plaintiffs accused PT Hijau for:
1) Appointment of an incompetent director and alleged the director’s appointment is in conflict with the principle of good corporate governance which may potentially cause major loss to PT Hijau. Thus, the plaintiffs wish for the appointment of the director to be cancelled.
2) The construction of the New Port Jetty is allegedly to have violated the provisions contained in the Article of Association of the company and the statutory provisions that apply in Indonesia.
For the uninitiated, Evergreen’s Indonesia operation dominates about 8%-10% of total production, and its main focus is on the production of medium density fibreboard. The above-mentioned jetty is a new pier built by the company about two years ago to enable their private loading to ease business operations without going through the congested government ports.
The management assured that business operations in Indonesia will not be affected by the litigation, as both the plaintiffs were not involved in running the business. The board is of the view that this litigation case brought against Evergreen by the plaintiffs is with bad faith with the purpose of pressuring Evergreen to buy the plaintiff’s shares at an unjustifiable value as requested by them. Worst case scenario, but unlikely.
In the event that Evergreen loses the case and the plaintiffs are awarded the asked amount (RM329 million), the company’s current net gearing position of 0.09 times will increase to 0.37 times. The potential additional interest expense could even exceed our current profit forecast of RM3.9 million, assuming the group takes up a loan of RM329 million to repay the plaintiffs.
However, according to Evergreen’s solicitors, the compensation requested by plaintiffs are not related to losses resulting from the allegedly unlawful act and is not supported by reasonable grounds and therefore, there may be a huge chance that it will not be acceptable by the court.
Maintain “hold”, with an unchanged TP of 37 sen based on an unchanged price to book (P/B) ratio of 0.28 times which is its historical five-year low, justified by weak earnings ahead as losses could potentially persist for the near-term quarters ahead. Nonetheless, the stock is rated a “hold” instead of a “sell” given that its current P/B is near through levels. — Hong Leong Investment Bank Research, May 8