PP 7767/09/2010(025354)

17 September 2010
RHB Research
Corporate Highlights
Malaysia
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
17 September 2010
MARKET DATELINE

Evergreen Fibreboard Share Price

Fair Value
:
:
RM1.55
RM2.57
Promising Outlook, Attractive Dividend Yield Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (EVERGRN; Code: 5101) Bloomberg: EVF MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing NDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009a 771.5 85.0 16.6 11.6 9.4 - 1.2 7.3 12.1 0.4 2.6
2010f 939.5 125.8 24.5 48.1 6.3 21.8 1.0 11.1 15.8 0.3 5.2
2011f 1013.8 132.0 25.7 4.9 6.0 24.5 0.9 5.7 14.9 0.2 6.5
2012f 1084.4 135.5 26.4 2.6 5.9 28.0 0.8 5.6 13.6 0.1 3.9
Main Market Listing /Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Utilisation rate and raw material costs. In 2Q10, Evergreen achieved a

Issued Capital (m shares) 513.0
capacity utilisation rate (inclusive of Indonesia capacity) of 82%, up from
Market Cap (RMm) 795.2
1Q10’s 77%. Raw material costs were also lower, and this was mainly due to
Daily Trading Vol (m shs) 0.54
the qoq fall in rubberwood and glue prices by 5.9% and 2.7% respectively.
Management expects rubberwood log and glue prices to increase slightly in 52wk Price Range (RM) 0.86-1.80

2H10. Major Shareholders: (%)

Kuo Family 45.9
♦ MDF selling prices stable. Selling prices for both thin and thick MDF have
been rising gradually in 1H10. However, management expects selling prices
to soften a bit for thin MDF (which constitutes about 30% of sales) in 2H10
due to cheaper substitute (particleboard), while selling prices for thick MDF FYE Dec FY10 FY11 FY12
are expected to remain stable.
EPS chg (%) - - -
♦ Appreciating RM vs. US$ is a concern. As the ringgit has appreciated Var to C.EPS (%) 12.5 5.0 (5.7)
sharply against the US$ recently, Evergreen has undertaken measures to
PE Band Chart
hedge its exposure through: 1) Converting some of its short-term loans to
US$-denominated loans; and 2) forward contracts in US$. We note that
Evergreen does not need to hedge all of its sales as about 30% of its cost is PER = 8x
US$-pegged (comprising mainly glue cost). PER = 6x
PER = 4x

♦ Capex and acquisition. Evergreen is budgeting RM20m as capex in 2H10

mainly for maintenance of its plant and machinery. Management said
expansion, if any, will be through acquisitions, if opportunities arise. We
think that Evergreen has no issue in funding its acquisition given its strong
cashflow and low net gearing of 0.3x as at 30 Jun 2010.
♦ Potentially higher dividend if no acquisition. Management highlighted Relative Performance To FBM KLCI
that there would not be any problem in paying out about 30% of earnings as
dividends for FY10 (estimated to be 8 sen or a net yield of 5.2%).
Furthermore, management indicated that the payout could go up to 40% or
50% if there is no acquisition, which would raise our dividend forecasts to Evergreen
10-12 sen for FY10. At current price, this would translate to a very attractive
net dividend yield of 6.4-7.6% for FY10.
♦ Risks. The risks include: 1) sharp drop in MDF price; 2) sharp increase in log FBM KLCI
costs; 3) escalation of crude oil related glue and logistics costs; and 4)
further strengthening of the ringgit which could reduce the company’s export
competitiveness.
♦ Forecasts. No changes to our forecasts.
♦ Investment case. Our fair value for Evergreen remains at RM2.57 based on
unchanged target PER of 10x FY12/11 earnings (which is at a 2x PE discount
to the timber sector due to its smaller market capitalisation). Given the Hoe Lee Leng
estimated 66% upside, plus the potential for a higher dividend payment, we (603) 92802158
maintain our Outperform recommendation on the stock. hoe.lee.leng@rhb.com.my

Please read important disclosures at the end of this report.

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♦ Utilisation rate and raw material costs. Evergreen reported very good results in 2Q10 (net profit +10.3%
qoq) mainly due to improvement in operational efficiency as well as lower raw material costs. In 2Q10,
Evergreen achieved a capacity utilisation rate (inclusive of Indonesia capacity) of 82%, up from 1Q10’s 77%.
Stripping out the idle capacity of the Indonesia plant, the capacity utilisation rate for Malaysia and Thailand
plants was at a high 90% in 2Q10. As for lower raw material costs, this was mainly due to the qoq fall in
rubberwood and glue prices by 5.9% and 2.7% respectively (see Chart 1 and Chart 2). Management expects
rubberwood log price to rise slightly in 2H10 after the increase in Jun 2010 (due to early monsoon weather in
Thailand). On the other hand, glue price is also expected to increase slightly in 2H10 due to higher pricing for
urea (one of the main raw materials to produce glue). In FY10, we have forecast rubberwood and glue costs to
rise by 9-10% yoy, which is in line with management’s numbers.

Chart 1: Rubberwood log price index

200

170

140

110

80

50
Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10
Source: Company

Chart 2: Glue price index

200

170

140

110

80

50
Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan-
04 04 05 05 06 06 07 07 08 08 09 09 10

Source: Company

♦ MDF selling prices stable. Selling prices for both thin and thick MDF have been rising gradually in 1H10 (see
Chart 3). However, management expects selling prices to soften a bit for thin MDF (constitutes about 30% of
sales) in 2H10 due to cheaper substitute (particleboard), while selling prices for thick MDF are expected to
remain stable. Our selling price assumptions are pretty much in line with the current average selling prices
achieved for FY10 and thus, we are maintaining our forecasts for now.

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 17 September 2010

Chart 3: Evergreen MDF Price from 2001-2010 (US$) Far East

350
US$

300

250

200

150 2.5mm (Thin)

18mm (Thick)

100
Jan-01

May-01

Sep-01

Jan-02

May-02

Sep-02

Jan-03

May-03

Sep-03

Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10
Source: Company

♦ …but appreciating RM vs. US$ a concern. Evergreen exports about 70-75% of its sales and these sales are
transacted in US$. As the ringgit has appreciated sharply against the US$ recently, Evergreen has undertaken
some measures to hedge its exposure. As highlighted in our previous visit note dated 2 Jun 2010, one of the
measures taken is to convert some of its short-term loans to US$-denominated loan. This is to act as a natural
hedge for its US$ transactions, as well as enabling Evergreen to benefit from the low interest rate environment
in the US (vs. Malaysia). The other measure, which Evergreen only started to do recently, is to hedge its
exposure through forward contracts in US$. We understand from management that it is trying to hedge partially
50% of its sales 3-4 months forward. As at 30 Jun 2010, Evergreen had outstanding forward contracts in US$
with a notional amount of RM38.7m and less than 1 year to maturity, and we think this will likely increase
further. We note that Evergreen does not need to hedge all its sales as about 30% of its costs are US$-pegged
(comprising mainly glue cost). No changes to our RM vs. US$ forex assumptions as we have just recently
adjusted the forex assumption for Evergreen in our timber sector report dated 7 Sep 2010 to reflect the
strengthening RM.

♦ Indonesian plant has started operations. We understand from management that its Indonesian plant
started operations in 3Q10. Nevertheless, the plant is not expected to contribute to 3Q10 earnings as the
capacity utilisation rate of the plant is not likely to surpass the breakeven rate so soon. Management is looking
at 4Q10 for earnings contribution from the Indonesian plant to kick in. However, to be conservative, we have not
factored in any contributions from the Indonesian operation in our FY10 forecast. In any case, we highlight that
the potential contribution from the Indonesian operation in 4Q10, if any, will only raise our FY10 forecast
marginally by 2%.

♦ Capex and acquisition. Evergreen is budgeting RM20m as capex in 2H10 mainly for maintenance of its plant
and machinery. Management said that there will not be any capex for organic expansion. Rather, expansion will
be through acquisitions, if opportunities arise. Management highlighted that they are currently looking at
potential acquisitions within South East Asia, and with pricing at single-digit PE. We think that Evergreen has no
issue in funding its acquisition given its strong cashflow and low net gearing of 0.3x as at 30 Jun 2010.

♦ Potentially higher dividend if no acquisition. Evergreen currently has a dividend payout policy of 30-50%
p.a.. Management highlighted that there would not be any problem in paying out about 30% of earnings as
dividends for FY10 (estimated to be 8 sen or a net yield of 5.2%) based on its strong cashflow and financial
position currently. Furthermore, management indicated that the payout could go up to 40% or 50% if there is
no acquisition, which would raise our dividend forecasts to 10-12 sen for FY10. At the current price, this would
translate to a very attractive net dividend yield of 6.4-7.6% for FY10.

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Risks

♦ Risks include: 1) sharp drop in MDF price; 2) sharp increase in log costs; 3) escalation of crude oil related glue
and logistics costs; and 4) further strengthening of the ringgit which could reduce the company’s export
competitiveness.

Forecasts

♦ Maintained. No changes to our earnings forecasts.

Valuations And Recommendation

♦ Maintain Outperform. We continue to like Evergreen given its market leading position in Southeast Asia’s MDF
industry and also its lean cost structure arising from high efficiency. Furthermore, we believe that Evergreen will
continue paying out generous dividends with 5.2-7.6% net dividend yield given its strong cashflow and financial
position. We value Evergreen at RM2.57 based on unchanged target PER of 10x FY12/11 earnings (which is at a
2x PE discount to the timber sector due to its smaller market capitalisation). Given the estimated 66% upside in
the share price, plus the potential for a higher dividend payment, we maintain our Outperform recommendation
on the stock.

Table 2. Earnings Forecasts Table 3. Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 771.5 939.5 1013.8 1084.4 Capacity utilisation (%) 80 85 90

Turnover growth (%) 5.6 21.8 7.9 7.0 Average MDF selling price (US$/m3) 264 277 296
Average particleboard price 116 121 131
(US$/m3)
Cost of Sales (562.1) (647.5) (701.2) (761.0) RM vs. US$ 3.15 3.10 3.10
Gross Profit 209.4 292.0 312.7 323.4

EBITDA 134.4 188.7 197.7 197.6

EBITDA margin (%) 17.4 20.1 19.5 18.2

Depr&Amor (37.8) (34.8) (33.1) (31.4)

Net Interest (17.8) (13.9) (11.8) (10.5)
Associates 1.9 1.2 1.2 1.2

Pretax Profit 80.8 141.2 154.0 156.9

Tax 0.2 (18.4) (20.0) (20.4)
Minorities 4.0 3.0 (2.0) (1.0)
Net Profit 85.0 125.8 132.0 135.5
Source: Company data, RHBRI estimates

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Chart 4: Evergrn Technical View Point

♦ Evergrn’s share price has been trending along the
Uptrend Line (UTL) since Apr 2009.

♦ Since early 2010, the stock has failed to cross over

the tough resistance level of RM1.75. It hit RM1.76
in Jan and touched a high of RM1.80 in Apr, but in
both occasions, it was trapped in a steep
downtrend immediately after it fell below the
hurdle.

♦ When it reached a low of RM1.33 in May, near the

long-term Uptrend Line (UTL) and an important
support level at RM1.34, it began to recover.

♦ Thereafter, the stock slowly scaled higher along the

supportive UTL and crossed over the RM1.59 level
in Jul.

♦ But, as its upward momentum deteriorated in

recent trading, the stock eased to below the UTL
and RM1.59.

♦ Registered with two negative candles in a row on

Wednesday, coupled with a fresh fall to below the
10-day and 40-day SMAs, the stock will likely
continue to drift lower, should it fail to rebound to
above the UTL in the near term.

♦ The next support level is at RM1.34.

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

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Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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