This article first appeared in The Edge Financial Daily, on October 28, 2015.

Evergreen Fibreboard Bhd
(Oct 27, RM2.12)
Maintain buy with a higher target price (TP) of RM2.53: We continue to see value for the company due to: 1) A stronger-than-expected US dollar against the ringgit, which in turn is favourable to Evergreen Fibreboard Bhd’s bottom line; 2) Benefits from management’s ongoing efforts to improve Evergreen Fibreboard’s operational efficiencies will start kicking in gradually from the second half of 2015 (2H15), in our view.

Year to date, the greenback has averaged at RM3.82 per US dollar, 6.1% higher than our assumption of RM3.60 per US dollar. A persistently strong US dollar (which in turn translates into higher selling prices in ringgit terms) and sustained sales volume, coupled with low key input prices (including glue and rubber log wood), will continue to drive Evergreen Fibreboard’s earnings higher.

Currency and key input prices aside, we believe part of management’s ongoing efforts to improve its operational efficiencies will start kicking in from 2H15 onwards (albeit on a gradual basis) and this will in turn result in improved production cost.

Beyond 2015, we still see strong earnings growth visibility in the company, underpinned by management’s ongoing efforts to improve operational efficiencies and expand product range. We also expect the ringgit to remain weak vis-à-vis the US dollar, which is positive to its bottom line.

We continue to see the possibility of Evergreen Fibreboard resuming payment of dividends as early as 2016, given its improving earnings fundamentals. Risks include escalating raw material and labour costs; slower-than-expected demand for medium density fibreboard; fluctuating foreign currency movement (in particularly the US dollar); and slower-than-expected turnaround in particleboard operations.

Financial year ending Dec 31, 2015 (FY15) to FY17 net profit forecasts raised by 12.2% to 21.6% respectively, largely to account for a higher US dollar against ringgit assumption of RM3.80/US dollar (versus RM3.60 per US dollar previously).

Positives include being a beneficiary of the strong US dollar and low oil price, a healthy balance sheet and rubber plantation land bank value that has yet to be reflected in the current share price valuation.

We maintain our “buy” recommendation, with a higher TP of RM2.53 (from RM2.10 previously) based on unchanged 11 times revised 2016 earnings per share of 23 sen. — Hong Leong Investment Bank Research, Oct 27