Evergreen’s improving earnings visibility

by **Cals** Fri 10 Jul 2015, 00:40

Evergreen’s improving earnings visibility

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By HLIB Research / The Edge Financial Daily | July 9, 2015 : 9:57 AM MYT

[size=14]Evergreen Fibreboard Bhd ([You must be registered and logged in to see this image.] Financial Dashboard)
(July 8, RM1.61)
Maintain buy with an increased target price (TP) of RM2.15: Evergreen Fibreboard Bhd’s share price has appreciated 20.7% since early July, outperforming the index by 20.4 percentage points (ppts) and surpassed our TP of RM1.59. We believe the strong share price performance was due to the stronger US dollar against the ringgit and declining crude oil price, which are both positive to Evergreen’s earnings.

In our view, Evergreen’s valuation remains commendable, despite the recent strong share price performance, as the ringgit will remain under pressure on the back of several issues (namely global monetary policy divergence, low commodity prices, and unresolved political glitches); and prices of key inputs, namely rubber log wood and glue (which in turn is derived from methanol and urea) remain on the downtrend, and these are supportive of Evergreen’s earnings.

The ringgit and lower key input prices aside, we note that management’s continuous efforts to further improve Evergreen’s output and cost efficiencies, and diversifying its product range will help drive its earnings higher. Given the improving earnings visibility and decent balance sheet with net gearing of less than 0.3 times as at March 31, 2015, we do not discount the possibility of Evergreen resuming paying dividends by 2016, although management remains tight-lipped on such a possibility.

Risks include escalating raw material and labour costs; slower-than-expected demand for medium-density fibreboard (MDF); fluctuating foreign currency movements (particularly the US dollar); and slower-than-expected turnaround at the particleboard operations. Financial year 2015-2017 (FY15-FY17) net profit forecasts raised by 6.4% to 12.9% to RM78.7 million, RM100.3 million and RM103 million respectively, largely to account for a higher USD:RM assumption of RM3.60:US$1 (vs RM3.50:US$1 previously); and slightly lower raw material cost assumptions.

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

Maintain buy with TP lifted by 35.2% to RM2.15 to reflect higher net profit forecasts; the roll forward of our valuation base year; and higher target price-earnings ratio (PER) of 11 times (from 10 times previous), given Evergreen’s improving earnings visibility. We note that our higher target PER of 11 times is still at a 19.5% discount to Thailand’s Vanachai Group Public Company Ltd’s 2016 PER of 13.5 times. — HLIB Research, July 8

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This article first appeared in The Edge Financial Daily, on July 9, 2015.
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