Extraordinary Turnaround: Evergreen Fibreboard

Ind Goods & ServicesMalaysia
July 20, 2015
COMPANY NOTE
Evergreen Fibreboard
EVF MK / EVGN.KL
Market Cap
Avg Daily Turnover
Free Float
US$245.9m
US$1.38m
55.0%
RM933.6m
RM5.15m
513.0 m shares
Current
RM1.82
Target
RM2.90
Prev. Target
N/A
Up/Downside
59.6%
Conviction|
Extraordinary turnaround
Notes from the Field
Evergreen (EVF) is one of Asias leading medium-density fibreboard

(MDF) manufacturers. After difficult years in 2012-14, EVF is poised
for an extraordinary turnaround from FY15 onwards, driven by a
strong dollar, falling raw material costs and internal restructuring.
Marcus CHAN, CFA

T (60) 3 2261 9070
E marcusty.chan@cimb.com
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Contents
BACKGROUND ................................................................... 4
OUTLOOK ............................................................................ 4
RISKS................................................................................... 8
FINANCIALS ...................................................................... 10
VALUATION AND RECOMMENDATION .......................... 12
APPENDIX ......................................................................... 13
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EFAHeading1 stylename. Any text/para using this style will
automatically get mirrored into TOC. Just select it and Press
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manually typeover.
We initiate coverage on EVF with an

Add rating and target price of RM2.90
(60% upside). We value EVF at FY16
P/E of 12.5x, in line with the MDF/PB
sector average. 2015-2016 should see
a strong re-rating as investors reward
US$ plays. With the potential sale of
non-core assets, EVF has room to
raise dividends substantially over the
next two years.
An MDF giant
EVF is one of Asias largest MDF
producers (and, we believe, the largest
in ASEAN), with capacity of 1.3m cu.
m. per annum spread across three
countries Malaysia, Thailand and
Indonesia. It has over 600 customers
across more than 40 countries
worldwide. About 70% of its revenues
are US$-denominated. Our sensitivity
analysis indicates that a 1%
strengthening of the US$ increases
EVFs FY15 EPS by 10%.
Margin expansion
EVF is an exciting turnaround story
with many tailwinds in its favour. We
expect EBITDA margin to accelerate
from 4% in FY13 to 22% in FY17,
driven by the 1) strong dollar, 2)
sharply lower raw material costs
(rubberwood logs and glue), 3) falling
freight cost, and 4) the benefits of
Price Close
351
1.30
258
0.80
164
0.30
20
70
15
Vol m
10
5
Oct-14
Jan-15
Apr-15
Source: Bloomberg
52-week share price range

1.82
1.82
0.49
Current
Target
Internal restructuring
EVF has embarked on a series of
internal restructuring projects to cut
costs, improve its manufacturing
processes and introduce new products
to improve margins. These benefits
are expected to flow through in
FY16-17s earnings. It is shutting
down unprofitable plants, buying
newer
equipment
to
reduce
processing time (thus, saving labour
and energy costs) and expanding its
particleboard (PB) and furniture
capacity. In addition, we expect EVF
to dispose of its non-core assets,
which could raise up to RM110m in
cash (21 sen/share) and could be used
to pare down debt and/or raise
dividends.
Still cheap
EVF is still under-researched. Its
larger-cap peer, Vanachai Group in
Thailand, is trading at FY16 P/E of 15x.
Our target price translates into a 20%
discount to this multiple. Compared
to Heveaboard, our earlier small-cap
initiation that was premised on a
weak RM-strong US$ theme, EVF is a
larger-cap and more liquid proxy for
Heveaboard but with the added kicker
of a sharp turnaround story.
Financial Summary
Relative to FBMKLCI (RHS)
1.80
Jul-14
internal restructuring.
2.90
Revenue (RMm)
Operating EBITDA (RMm)
Net Profit (RMm)
Core EPS (RM)
Core EPS Growth
FD Core P/E (x)
DPS (RM)
Dividend Yield
EV/EBITDA (x)
P/FCFE (x)
Net Gearing
P/BV (x)
ROE
% Change In Core EPS Estimates
CIMB/consensus EPS (x)
Dec-13A
939
33.2
(42.7)
-0.08
0%
NA
0.00%
37.29
NA
35.0%
1.19
Dec-14A
942
80.5
0.2
0.00
NA
5,492
0.00%
14.61
85.81
25.8%
1.16
0.0%
Dec-15F
967
175.3
83.4
0.16
48940%
11
0.010
0.55%
6.12
11.06
12.1%
1.06
9.9%
Dec-16F
995
217.0
119.2
0.23
43%
8
0.050
2.75%
4.53
9.63
1.8%
0.96
12.9%
Dec-17F
1,016
225.0
126.9
0.25
6%
7
0.050
2.75%
3.77
6.04
(10.5%)
0.87
12.4%
1.35
1.55
1.50
SOURCE: CIMB, COMPANY REPORTS

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT.
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Evergreen FibreboardMalaysia
July 20, 2015
BY THE NUMBERS
Share price info
Share px perf. (%)
1M
3M
12M
Relative
50.1
58.3
261.9
Absolute
50.4
51.7
Major shareholders
253.4
% held
Kuo family
45.0
P/BV vs ROE
12-mth Fwd FD Core P/E vs FD Core EPS
1.20
14.0%
1.00
11.7%
0.80
9.3%
0.60
7.0%
0.40
4.7%
0.20
2.3%
0.00
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
0.0%
Rolling P/BV (x) (lhs)
Growth
1,600
1,400
1,200
1,000
800
600
400
200
0
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
60,000%
52,500%
45,000%
37,500%
30,000%
22,500%
15,000%
7,500%
0%
12-mth Fwd Rolling FD Core P/E (x) (lhs)
ROE (See Footnote) (rhs)
FD Core EPS Growth (rhs)
Profit & Loss
Margin expansion driven by 1)

stronger US$, and 2) benefits of
internal restructuring lower raw
material and operating costs.
(RMm)
Total Net Revenues
Gross Profit
Operating EBITDA
Depreciation And Amortisation
Operating EBIT
Financial Income/(Expense)
Pretax Income/(Loss) from Assoc.
Non-Operating Income/(Expense)
Profit Before Tax (pre-EI)
Exceptional Items
Pre-tax Profit
Taxation
Exceptional Income - post-tax
Profit After Tax
Minority Interests
Preferred Dividends
FX Gain/(Loss) - post tax
Other Adjustments - post-tax
Net Profit
Recurring Net Profit
Fully Diluted Recurring Net Profit
Dec-13A
939
196
33
-68
-35
-14
0
0
-49
Dec-14A
942
231
81
-64
16
-12
0
0
4
Dec-15F
967
330
175
-64
111
-10
0
0
102
Dec-16F
995
376
217
-65
152
-7
0
0
145
Dec-17F
1,016
388
225
-65
160
-5
0
0
154
-49
4
4
-3
102
-17
145
-25
154
-26
-45
2
2
-1
84
-1
120
-1
128
-1
-43
-43
-43
0
0
0
83
83
83
119
119
119
127
127
127
Dec-13A
33.2
Dec-14A
80.5
Dec-15F
175.3
Dec-16F
217.0
Dec-17F
225.0
(8.0)
(2.8)
Cash Flow
Capex for various upgrades and
modernisation of MDF lines and new
particleboard line.
(RMm)
EBITDA
Cash Flow from Invt. & Assoc.
Change In Working Capital
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense
Other Operating Cashflow
Net Interest (Paid)/Received
Tax Paid
Cashflow From Operations
Capex
Disposals Of FAs/subsidiaries
Acq. Of Subsidiaries/investments
Other Investing Cashflow
Cash Flow From Investing
Debt Raised/(repaid)
Proceeds From Issue Of Shares
Shares Repurchased
Dividends Paid
Preferred Dividends
Other Financing Cashflow
Cash Flow From Financing
Total Cash Generated
Free Cashflow To Equity
Free Cashflow To Firm
(14.4)
16.4
20.9
(14.7)
3.9
8.1
(9.8)
(12.1)
(2.7)
82.1
(12.0)
(9.5)
(17.3)
169.4
(60.0)
(7.4)
(24.6)
177.0
(60.0)
(5.5)
(26.2)
190.5
(30.0)
(9.8)
(41.1)
(12.0)
(59.2)
(60.0)
(25.0)
(60.0)
(20.0)
(30.0)
(6.0)
0.0
0.0
(5.1)
(25.7)
(25.7)
(41.1)
(42.8)
(42.8)
13.2
(59.2)
10.9
10.9
83.2
(30.1)
79.3
84.4
120.2
(45.7)
71.3
97.0
126.7
(31.7)
128.9
154.5
169.6
SOURCE: CIMB RESEARCH, COMPANY
July 20, 2015
BY THE NUMBERS
Balance Sheet
Cash pile could rise further if sale of

non-core assets materialises, driving
dividends higher.
(RMm)
Total Cash And Equivalents
Total Debtors
Inventories
Total Other Current Assets
Total Current Assets
Fixed Assets
Total Investments
Intangible Assets
Total Other Non-Current Assets
Total Non-current Assets
Short-term Debt
Current Portion of Long-Term Debt
Total Creditors
Other Current Liabilities
Total Current Liabilities
Total Long-term Debt
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities
Total Non-current Liabilities
Total Provisions
Total Liabilities
Shareholders' Equity
Minority Interests
Total Equity
Dec-13A
56
89
211
55
411
797
0
20
59
876
268
Dec-14A
74
97
215
29
415
777
0
20
57
854
237
Dec-15F
153
84
199
30
466
773
0
20
57
850
237
Dec-16F
224
87
205
30
547
768
0
20
57
845
237
Dec-17F
353
89
210
31
683
733
0
20
57
809
237
129
3
400
69
135
0
372
51
128
0
365
26
129
0
366
6
133
0
370
0
0
69
13
481
783
22
805
0
51
16
439
802
29
830
0
26
16
407
880
30
910
0
6
16
388
973
31
1,004
0
0
16
386
1,075
32
1,106
Dec-13A
0.00%
0%
3.5%
-0.55
1.53
-2.36
0.0%
NA
34.78
103.7
63.36
(3.2%)
N/A
N/A
Dec-14A
0.35%
143%
8.5%
-0.42
1.56
1.26
62.8%
NA
36.20
109.4
67.73
1.5%
1.5%
1.3%
Dec-15F
2.64%
118%
18.1%
-0.21
1.72
10.30
17.0%
5.1%
34.30
118.9
75.27
10.5%
9.7%
8.6%
Dec-16F
2.90%
24%
21.8%
-0.04
1.90
15.66
17.0%
17.8%
31.47
119.7
75.81
14.7%
12.6%
11.2%
Dec-17F
2.15%
4%
22.1%
0.23
2.09
17.56
17.0%
16.8%
31.50
120.4
75.89
15.4%
12.4%
11.1%
Dec-13A
N/A
0.0%
84.0%
N/A
N/A
N/A
-20.0%
N/A
Dec-14A
N/A
0.0%
83.0%
N/A
N/A
N/A
-10.0%
N/A
Dec-15F
N/A
0.0%
84.0%
N/A
N/A
N/A
-20.0%
N/A
Dec-16F
N/A
1.0%
85.0%
N/A
N/A
N/A
0.0%
N/A
Dec-17F
N/A
2.0%
86.0%
N/A
N/A
N/A
0.0%
N/A
Key Ratios
Dividend payout should start rising

from FY16 onwards following the sale
of non-core assets and strong
operating performance.
Revenue Growth
Operating EBITDA Growth
Operating EBITDA Margin
Net Cash Per Share (RM)
BVPS (RM)
Gross Interest Cover
Effective Tax Rate
Net Dividend Payout Ratio
Accounts Receivables Days
Inventory Days
Accounts Payables Days
ROIC (%)
ROCE (%)
Return On Average Assets
Key Drivers
Rubberwood costs have fallen 50%

from its peak in 2012.
ASP (% chg, main prod./serv.)

Unit sales grth (%, main prod./serv.)
Util. rate (%, main prod./serv.)
ASP (% chg, 2ndary prod./serv.)
Unit sales grth (%,2ndary prod/serv)
Util. rate (%, 2ndary prod/serv)
Unit raw mat ASP (%chg,main)
Unit raw mat ASP (%chg,2ndary)
SOURCE: CIMB RESEARCH, COMPANY
July 20, 2015
Extraordinary turnaround
BACKGROUND
ASEANs largest MDF producer
Evergreen Fibreboard (EVF) is one of Asias largest producers of
medium-density fibreboard (MDF), with capacity of 1.3m cu. m of MDF per
annum. In ASEAN, the Vanachai Group (VNG TB not rated) in Thailand has a
larger capacity of 2m cu. m but only produces 900k of MDF per annum (the
balance is particleboard production), thus making EVF the largest producer of
MDF in ASEAN. EVF has 10 MDF production lines and one particleboard
production line spread across three countries Malaysia, Thailand and
Indonesia. It has built up a customer base of over 600 customers across more
than 40 countries worldwide. No single customer accounts for more than 10%
of group revenue. EVF has smaller operations that produce particleboard and
ready-to-assemble (RTA) furniture. It manufactures its own glue requirements
from its adhesive plants in Batu Pahat, Johor and Gurun, Kedah. EVF also
owns 4,400 acres of rubber plantation land in Johor.
OUTLOOK
Beneficiary of US$ strength
70% of EVFs export revenue is denominated in US$ while the remaining 30%
is local currency-denominated (RM, THB and Rp). 30% of its raw material
costs are US$-denominated, primarily the glue components and some imported
machinery spare parts. However, this has been mitigated by the fall in oil prices,
leading to a decline in glue cost. Our FY15 earnings forecast is based on an
average US$/RM3.60. Our forex strategist has a forecast RM/US$ year-end
exchange rate of RM3.70 in 2015 and 2016. Since May 15, the ringgit has
depreciated against the US$ to above 3.60. It has been trading between 3.70
and 3.80 since Jun 15. Thus, there is ample scope for upward earnings revisions
if the ringgit remains weak. Our sensitivity analysis indicates that every
US$/RM0.10 strengthening of the US$ increases EVFs FY15 EPS by 10%.
Figure 1: RM continues to depreciate against US$
SOURCES: CIMB, COMPANY REPORTS
July 20, 2015
Falling raw material prices

Figure 2: Cost of MDF production
Electricity, 10%
Wood, 30%
Labour/overheads, 30%
Glue, 30%
Figure 4: Glue price index
Figure 3: Rubberwood log price index
SOURCE: EVF
SOURCE: EVF
EVFs earnings were severely dented in FY12-14 as it was overly aggressive in

bidding for high-priced rubber logging concessions in 2011-12. When rubber
prices fell sharply, EVF was left holding high-priced rubberwood inventories
until 2Q14. EVF had to write off RM20m in inventories in FY13 and FY14 each.
Rubberwood prices have come off by almost 50% from its peak levels due to the
ample supply of logs on the back of weak latex prices. Thus, we expect EVF to
enjoy lower raw material costs (about 30% of the cost of production), which will
boost margins.
Glue cost forms about 30% of the cost of MDF production. Given the weak oil
prices, glue prices have also declined by 25% from its peak levels and continued
to exhibit a steady, downward trend. This will also boost EVFs margins. EVF
manufactures its own glue requirements from its plants in Gurun, Kedah
(supplies its Hat Yai, Thailand plant) and Batu Pahat, Johor (supplies its plants
in Negeri Sembilan, Johor and Indonesia).
Our sensitivity analysis suggests that every 1% decline in the price of logs will
increase EVFs FY15 EPS by 2% while a 1% decline in glue cost will also increase
EVFs FY15 EPS by 2%.
July 20, 2015
Lower freight cost

Figure 6: as have container freight rates
Figure 5: Bulk shipping rates have collapsed

35,000
120%
100%
30,000
80%
25,000
60%
20,000
Title:
Source:
1,800
1,600
1,400
Please fill in the values above to have them entered
in your rep
1,200
40%
1,000
20%
15,000
800
0%
10,000
600
-20%
5,000
-40%
-60%
400
200
-80%
0
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
Supramax TCE rates (US$/day)
Handysize TCE rates (US$/day)
Yoy (%) - LHS
SCFI: Shanghai-Mid East (US$/teu)
EVF quotes its export sales in CIF (cost, insurance and freight) terms, which
means that any increase in freight rates lifts its selling/admin expenses and vice
versa. EVF used to ship its goods in containers but has since switched to break
bulk, which is substantially cheaper. Both container and bulk rates have
collapsed in the past two years and our regional shipping analyst, Raymond Yap,
does not see a sustainable recovery in rates in the next 1-2 years. This bodes
well for EVF as it opens up new markets, such as Africa, and existing markets,
such as the Middle East, become very lucrative. Middle Eastern customers tend
to pay cash instead of utilising letters of credit. Hence, sales to the Middle East
have risen from 23% in FY13 to 44% YTD in 2015 (Figure 9).
Benefits of internal restructuring

Since 2013, when EVF suffered its only annual loss in its operating history due
to a combination of lower selling prices and high raw material cost,
management has embarked on a series of projects to improve its manufacturing
processes and upgrade its plants in a bid to cut costs and introduce new
products to improve margins. These benefits are expected to flow through in
FY16-17s earnings.
1)
Cost rationalisation exercise (CRE)
EVF is committing RM35m in capex in its Batu Pahat plant to improve the
efficiency of its MDF manufacturing process and expanding its RTA furniture
capacity. EVF is investing in 1) a new chipping plant, which will halve the time
taken for the rubberwood chipping process, and 2) a new finishing line. EVF
has acquired a state-of-the-art Anthon CTS sanding and cut-to-size line from
Germany that will also improve automation. These two initiatives will reduce
the use of manual labour and save on electricity cost. The new equipment
should be installed by this month but, allowing for delays, we have
conservatively estimated that EVF will enjoy cost savings of RM6m per annum
starting in FY16.
2) Restructure and refurbishment (RAR)
EVF is relocating one of its smaller MDF plants in Masai, Johor (120,000 cu. m
per annum) to Segamat, Johor. The Masai plant was loss-making as it had poor
access to raw materials. The MDF line will be dismantled, refurbished and
re-installed in the Segamat plant (the location of the particleboard operations).
With the sharing of the energy plant and finishing processes with the
particleboard line, plant maintenance costs are expected to decline and it will
have a leaner operation with lower headcount and labour costs. This project
will cost RM7m and is expected to contribute c.RM6m in net profit per annum
starting in mid-FY16. EVF will dispose of the land and building in Masai. We
estimate the value of this facility to be RM30m, based on comparable prices of
6
July 20, 2015
land in the vicinity. EVF may also dispose of its rubber plantation in Mersing,
Johor (4,400 ac. 3,000 ac. planted, 1,400 ac. unplanted), which could raise
another RM80m, based on c.RM100k/ac. for planted acreage and RM8k/ac. for
unplanted acreage, derived from asking prices for land in that vicinity.
Depending on when the sale of these non-core assets materialise, investors
could receive a pleasant special dividend surprise in FY15-16.
3) Replace, upgrade, modernise (RUM)
In tandem with the relocation of the Masai MDF line to Segamat, the
particleboard (PB) line in Segamat will also be upgraded. EVF will be spending
RM70m to replace its older PB line with the latest Dieffenbacher pressing line
from Germany. The PB line will also be refurbished to increase capacity and
quality to enable EVF to produce niche high-quality PB, such as E1, E0 and
super-E0 boards. A new boiler system will also be installed. These initiatives
will result in lower manpower and electricity cost.
The Segamat plant, when completed, will be an integrated plant that will be
able to produce MDF, PB and pellets. This will result in substantial synergistic
cost savings, especially for raw material usage as MDF will utilise rubberwood,
PB will be able to use rubberwood slabs and pellets will be able to utilise any
balance wood waste arising from MDF and PB chipping processes.
Management anticipates that this could add c.RM18m in net profit per annum
to EVFs bottomline. We believe that this forecast is conservative. Based on its
peer Heveaboards selling prices for high-end particleboards and assuming
80% utilisation for the new PB line, we estimate that the PB line alone could
generate RM18m in net profit p.a. for EVF.
The integrated plant is expected to be completed by end-16. To be conservative,
we have assumed only half of this benefit in our FY17 EPS forecast (RM9m) to
account for execution risk/delays.
4) Value-added products (VAP)
EVF is expanding its RTA furniture capacity. Management has remained
tight-lipped about the details of the new furniture line but we expect margins
for the new furniture line to be higher than MDF margins. The project is slated
for completion by end-15 and is expected to contribute c.RM12m per annum in
net profit to the group.
SWOT analysis
Figure 7: SWOT analysis
Strengths
Opportunities
Export-driven business model
New demand for niche particleboard products
Diversified customer base across regions
Cost savings from internal restructuring
Diversified base of operations

Experienced and focused management
Weaknesses
Threats
Cyclical industry
Fall in MDF prices
Operating at almost full capacity
Sudden rise in raw material cost

Our SWOT analysis shows that EVF has two main strengths:a) It has built up a large and diversified customer base. It has over 600
customers across more than 40 countries worldwide. No single
customer accounts for more than 10% of group revenue. YTD, Malaysia
is the largest revenue contributor at 16%, followed by Saudi Arabia
(12%), Vietnam (11%), Indonesia (7%) and UAE (7%). This helps EVF to
avoid geographic and customer concentration risk. As a result of its
worldwide network of distributors, retailers and sales teams, it is able
to switch quickly to lucrative markets, such as the Middle East (Fig 9),
and
b) It has a diversified base of operations Malaysia, Thailand and
Indonesia, all of which are top rubber producers, thus ensuring the
plentiful supply of raw materials. Each country enables access to
7
July 20, 2015
different export markets, in addition to possessing large domestic

demand potential, especially Indonesia, where EVF is coming off a low
base.
Figure 8: Breakdown of sales (%) by region
60
50
40
30
20
10
Mid East
SEA
US
2015
Mediterranean
2014
2013
2012
Europe
Africa
Others
2011
RISKS
Forex risk
70% of EVFs revenues are US$-denominated. As EVF is a beneficiary of a
strong dollar, a sharp depreciation of the dollar will have a negative impact on
profit margins. Our sensitivity analysis indicates that every US$/RM0.10
weakening of the US$ decreases EVFs FY15 EPS by 10%.
Rising raw material prices

Wood and glue combined make up 60% of the cost of production for MDF. Any
sharp rise in the price of rubberwood and/or glue prices will have a negative
impact on EVFs gross margins. Management is of the view that rubberwood
prices will remain stable over the next 9-12 months. Our channel checks with
other manufacturers suggest the same, that rubberwood prices will remain
benign over the next year. Our sensitivity analysis suggests that every 1%
increase in the price of logs will raise EVFs EPS by 2% while a 1% increase in
glue cost will also nudge up EVFs EPS by 2%.
July 20, 2015
Labour and electricity

Electricity accounts for 10% of EVFs cost of production. Any rise in electricity
tariffs will hurt margins. Our utility analyst, Saw Xiao Jun, is of the view that
TNBs tariff should remain stable until 2018.
Any disruption as a result of a change in government policies on foreign
workers could be operationally disruptive. Management will continue to invest
in machinery to increase automation and reduce its reliance on labour. This is
part of its CRE initiative.
MDF prices
Figure 9: MDF sales price index
In 2010-11, total MDF industry capacity rose by over 30%. In ASEAN, new
players in Thailand, Vietnam and Indonesian added new production lines. As a
result, a price war erupted as newer players with expensive new lines fought
aggressively to increase market share. This led to a collapse in MDF prices
(Figure 10). Any sharp increase in ASEAN MDF supply could lead to another
price collapse. However, according to Wood Based Panels International (WBPI),
global MDF capacity is only expected to increase by 4% during 2014-2017,
which suggests a benign supply environment over the next few years.
July 20, 2015
Figure 10: WBPI forecasts global MDF capacity to rise by only 4% in 2014-17
FINANCIALS
Strong earnings turnaround starting in FY15
The trough of EVFs earnings cycle was in 2Q14, when it registered a loss of
RM22m (due to the final write-off of RM20m in high-priced rubberwood
inventory). We forecast a very strong earnings recovery in FY15, with net profit
to rise almost 500x to RM83m (FY14: RM0.2m) from 1) a stronger dollar (we
forecast an average rate of 3.60 RM/US$), and 2) lower raw material cost. Our
projected FY16 EPS growth of 43% will be driven by contributions from the
various internal restructuring initiatives (outlined on pages 7-8). By FY17, when
the integrated plant in Segamat is ready, earnings should be boosted by the
additional profit contribution from high-margin particleboards and pellets.
10
July 20, 2015
Figure 11: EVF: Quarterly earnings trend

25000
20000
15000
10000
5000
0
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
-5000
-10000
-15000
-20000
-25000
Net profit (RM'000)
Figure 12: Margin expansion driven by strong dollar, lower raw material cost and
internal restructuring benefits
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2009
2010
2011
2012
2013
2014A
2015F
2016F
2017F
EBITDA margin (%)
Net cash by end-2017

The total capex of c.RM110m for the internal restructuring programme will be
financed by borrowings (RM90m) and internal funds (RM20m). As at 1Q15,
gross borrowings stood at RM288m (net gearing: 26%). 20% of group
borrowings are US$-denominated and most of its borrowings are short term in
nature, mainly trade facilities. We forecast capex of RM60m per annum in FY15
and FY16, before it falls to RM30m in FY17 when capex will largely be for
maintenance, after the restructuring programme is complete. We expect EVF to
turn net cash by end-2017. We believe that EVFs ROE is poorer compared to its
peers as it has non-core assets that are not income-generating. Assuming the
full disposal of c.RM110m in non-core assets is paid out in dividends, FY16
ROE could rise from 12.8% to 14.6%, an increase of 180bps.
11
July 20, 2015
Figure 13: Breakdown of borrowings by currency
Figure 14: Breakdown of borrowings by type
Others, 1%
Title:
Source:
Please fill in the values above to have them entered in your rep
Baht, 24%
Term loans, 30%
RM, 54%
Trade facilities,
70%
US$, 20%
RM
US$
Baht
Others
Trade facilities
Term loans
Dividend policy
EVF has a dividend policy of paying 20-50% of profits as dividends. However, it
suspended this policy in FY13 and FY14 due to the companys heavy losses. We
forecast a resumption of the payout to 20-22% in FY16-17 and a nominal
dividend of 1 sen/share in FY15. We believe that these are conservative
forecasts. Under the RAR initiative above, EVF intends to sell off the
land/building of its old Masai plant and possibly its rubber plantation. We
estimate that these could yield proceeds of up to RM110m (21 sen/share), which
could be used to 1) reduce borrowings, and/or 2) pay higher dividends.
Figure 15: EVFs DPS (sen) and payout ratio (%)
6
30%
5.5
5
25%
20%
15%
10%
1.5
1
0
2009
2010
2011
2012
DPS
2013
2014A
5%
0%
2015F
2016F
2017F
Dividend payout ratio (%)
VALUATION AND RECOMMENDATION

Initiate coverage with an Add and target price of RM2.90
There are currently only two local research houses that actively cover EVF. We
like EVF for its strong dollar exposure and restructuring potential. Thus, we
initiate coverage on EVF with an Add rating. Our target price of RM2.90 (60%
upside) is based on FY16 P/E of 12.5x, in line with the target MDF/PB sector
average (Vanachai Group and Heveaboard). Compared to Heveaboard (Hevea),
its much smaller-cap peer, which we initiated coverage on with an Add rating in
Feb 15, 1) EVFs market cap is 3x larger, with 3x more trading liquidity
(US$1.4m average daily turnover), and 2) EVF should have wider investment
appeal to foreign investors given its larger market cap and liquidity. Our
12
July 20, 2015
experience in marketing Hevea since our initiation in Feb 15 revealed that many
funds are restricted from buying small-cap stocks that are below US$100m in
market cap and less than US$1m in ADT.
Figure 16: Sector Comparison
Company
HeveaBoard Bhd
Evergreen Fibreboard
Vanachai Group
Malaysia average
Bloomberg
Recom.
Ticker
HAVE MK
ADD
EVF MK
ADD
VNG TB Not rated
Price
(local
curr)
3.81
1.82
12.30
Target
Market
Core P/E (x)
2-year
P/BV (x)
Recurring ROE
(local Cap (US$
EPS
CY2015 CY2016
CY2015 CY2016 CY2015 CY2016
curr)
m)
CAGR (%)
4.56
102
9.4
7.9
35.9%
1.18
0.99
19.7% 19.3%
2.89
246
11.2
7.9
764.8%
1.06
0.96
10.3% 12.8%
N/A
563
17.1
15.2
30.0%
2.51
2.28
14.2% 14.8%
12.6
10.3
277%
1.6
1.4
14.7% 15.7%
Dividend Yield
CY2015 CY2016
1.6%
0.5%
2.7%
1.6%
2.1%
2.7%
2.9%
2.6%
APPENDIX
Difference between particleboard and MDF
Both particleboard and MDF are engineered wood products manufactured from
rubberwood residues and synthetic resin, which are pressed and extruded. The
main difference in the production process is that the wood waste in MDF is
cooked by steaming the chips in a highly-pressurised digester. This will soften
the chips and allow for more compact pressing, which results in a board that is
more water-resistant and stiffer than particleboard. MDF is also more versatile
when it comes to shaping/molding as particleboard has a tendency to chip and
break more easily. Particleboard, on the other hand, is lighter, cheaper and
holds screws better.
Owned by the Kuo family

EVF was incorporated in 1991 and listed on the Main Board of Bursa Malaysia
on 11 Mar 2005. It was founded by Mr Kuo Wen Chi (aged 81). He still sits on
the board as non-independent deputy chairman but the business is run by his
sons, Kuo Jen Chang (aged 52, chief executive officer) and Kuo Jen Chiu (aged
49, chief operating officer). Jen Chang oversees the Thailand operations while
Jen Chiu oversees the Malaysian and Indonesian operations. The Kuo family
owns a 45% stake in EVF. None of Mr Kuo Jen Changs or Kuo Jen Chis
children are involved in the business.
Manufacturing facilities
EVF has 10 plants located in Malaysia, Thailand and Indonesia. In Malaysia,
EVF has seven plants in Johor and Negeri Sembilan to produce MDF,
laminated wood products and particleboard. Its biggest MDF plant is located in
Hat Yai, Thailand (570,000 cu. m per annum), started in 2004. EVF also
ventured into Indonesia in 2007 with a plant in Palembang (MDF capacity of
120,000 cu. m per annum). It manufactures its own glue requirements from its
adhesive plants in Batu Pahat, Johor and Gurun, Kedah.
Figure 17: EVFs MDF manufacturing capacity across locations (cu.m. per annum)
600,000
570,000
500,000
400,000
300,000
250,000
250,000
200,000
120,000
120,000
Segamat
Indonesia
100,000
Hat Yai, Thailand
Nilai, Negeri Sembilan
Batu Pahat, Johor
13
July 20, 2015
Figure 18: EVFs MDF capacity utilisation (2011-14)
14
July 20, 2015
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18
July 20, 2015
professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
Distribution of stock ratings and investment banking clients for quarter ended on 30 June 2015
1508 companies under coverage for quarter ended on 30 June 2015
Rating Distribution (%)
Investment Banking clients (%)
Add
56.5%
6.7%
Hold
30.7%
4.5%
Reduce
12.6%
1.7%
Spitzer Chart for stock being researched ( 2 year data )

Evergreen Fibreboard (EVF MK)
Price Close
1.90
1.70
1.50
1.30
1.10
0.90
0.70
0.50
0.30
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2014.
AAV Very Good, ADVANC Very Good, AEONTS not available, AMATA - Good, ANAN Very Good, AOT Very Good, AP - Good, ASK Very Good,
ASP Very Good, BANPU Very Good , BAY Very Good , BBL Very Good, BCH not available, BCP - Excellent, BEAUTY Good, BEC - Good, BECL
Very Good, BGH - not available, BH - Good, BIGC - Very Good, BJC Good, BLA Very Good, BMCL - Very Good, BTS - Excellent, CCET Good,
CENTEL Very Good, CHG not available, CK Very Good, CPALL not available, CPF Very Good, CPN - Excellent, DELTA - Very Good, DEMCO Good,
DTAC Very Good, EA - Good, ECL not available, EGCO - Excellent, GFPT - Very Good, GLOBAL - Good, GLOW - Good, GRAMMY - Excellent, HANA Excellent, HEMRAJ Very Good, HMPRO - Very Good, ICHI - not available, INTUCH - Excellent, ITD Good, IVL - Excellent, JAS not available, JUBILE
not available, KAMART not available, KBANK - Excellent, KCE - Very Good, KGI Good, KKP Excellent, KTB - Excellent, KTC Good, LH - Very Good,
LPN Very Good, M - not available, MAJOR - Good, MAKRO Good, MBKET Good, MC Very Good, MCOT Very Good, MEGA Good, MINT Excellent, OFM Very Good, OISHI Good, PS Very Good, PSL - Excellent, PTT - Excellent, PTTEP - Excellent, PTTGC - Excellent, QH Very Good,
RATCH Very Good, ROBINS Very Good, RS Very Good, SAMART - Excellent, SAPPE - not available, SAT Excellent, SAWAD not available, SC
Excellent, SCB - Excellent, SCBLIF Good, SCC Very Good, SCCC - Good, SIM - Excellent, SIRI - Good, SPALI - Excellent, STA Very Good, STEC - Good,
SVI Very Good, TASCO Good, TCAP Very Good, THAI Very Good, THANI Very Good, THCOM Very Good, THRE not available, THREL Good,
TICON Good, TISCO - Excellent, TK Very Good, TMB - Excellent, TOP - Excellent, TRUE Very Good, TTW Very Good, TUF - Good, VGI Very Good,
WORK not available.
19
July 20, 2015
CIMB Recommendation Framework

Stock Ratings
Definition:
Add
The stocks total return is expected to exceed 10% over the next 12 months.
Hold
The stocks total return is expected to be between 0% and positive 10% over the next 12 months.
Reduce
The stocks total return is expected to fall below 0% or more over the next 12 months.
The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward
net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.
Sector Ratings
Overweight
Neutral
Underweight
Definition:
An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.
A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.
An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.
Country Ratings
Overweight
Neutral
Underweight
Definition:
An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.
A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.
An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.
*Prior to December 2013 CIMB recommendation framework for stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand,
Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange were
based on a stocks total return relative to the relevant benchmarks total return. Outperform: expected to exceed by 5% or more over the next 12 months.
Neutral: expected to be within +/-5% over the next 12 months. Underperform: expected to be below by 5% or more over the next 12 months. Trading Buy:
expected to exceed by 3% or more over the next 3 months. Trading Sell: expected to be below by 3% or more over the next 3 months. For stocks listed on
Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Outperform: Expected positive total returns of 10% or
more over the next 12 months. Neutral: Expected total returns of between -10% and +10% over the next 12 months. Underperform: Expected negative total
returns of 10% or more over the next 12 months. Trading Buy: Expected positive total returns of 10% or more over the next 3 months. Trading Sell: Expected
negative total returns of 10% or more over the next 3 months.
20

Extraordinary Turnaround: Evergreen Fibreboard

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Extraordinary Turnaround: Evergreen Fibreboard

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Ind Goods & ServicesMalaysia

July 20, 2015

Avg Daily Turnover

Notes from the Field

Evergreen (EVF) is one of Asias leading medium-density fibreboard

Marcus CHAN, CFA

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Note: Above entries are linked to doc headers using

We initiate coverage on EVF with an

52-week share price range

Relative to FBMKLCI (RHS)

SOURCE: CIMB, COMPANY REPORTS

12-mth Fwd FD Core P/E vs FD Core EPS

Rolling P/BV (x) (lhs)

12-mth Fwd Rolling FD Core P/E (x) (lhs)

ROE (See Footnote) (rhs)

FD Core EPS Growth (rhs)

Profit & Loss

Margin expansion driven by 1)

SOURCE: CIMB RESEARCH, COMPANY

Cash pile could rise further if sale of

Dividend payout should start rising

Rubberwood costs have fallen 50%

ASP (% chg, main prod./serv.)

SOURCE: CIMB RESEARCH, COMPANY

SOURCES: CIMB, COMPANY REPORTS

Falling raw material prices

SOURCES: CIMB, COMPANY REPORTS

Figure 4: Glue price index

Figure 3: Rubberwood log price index

EVFs earnings were severely dented in FY12-14 as it was overly aggressive in

Lower freight cost

Figure 5: Bulk shipping rates have collapsed

Handysize TCE rates (US$/day)

Yoy (%) - LHS

SOURCES: CIMB, COMPANY REPORTS

SCFI: Shanghai-Mid East (US$/teu)

SOURCES: CIMB, COMPANY REPORTS

Benefits of internal restructuring

Cost rationalisation exercise (CRE)

Export-driven business model

New demand for niche particleboard products

Diversified customer base across regions

Cost savings from internal restructuring

Diversified base of operations

Fall in MDF prices

Operating at almost full capacity

Sudden rise in raw material cost

different export markets, in addition to possessing large domestic

SOURCES: CIMB, COMPANY REPORTS

Rising raw material prices

Labour and electricity

SOURCES: CIMB, COMPANY REPORTS

SOURCES: CIMB, COMPANY REPORTS

Figure 11: EVF: Quarterly earnings trend

SOURCES: CIMB, COMPANY REPORTS

EBITDA margin (%)

SOURCES: CIMB, COMPANY REPORTS

Net cash by end-2017

Figure 13: Breakdown of borrowings by currency

Figure 14: Breakdown of borrowings by type

Term loans, 30%

SOURCES: CIMB, COMPANY REPORTS