Evergreen Fibreboard Bhd ( Valuation: 0.30, Fundamental: 1.00)
(Jan 15, RM2.40)
Maintain buy with a higher target price (TP) of RM2.75: Management sees little impact from the minimum wage hike (which will be raised by RM100 to RM900 per month effective July 1), as it has less than 400 unskilled workers earning minimum wages.
Moreover, the company is gradually reducing headcount through its cost-rationalisation exercise (which involves investment in a new chipping plant and finishing line), which will also result in improved production efficiency and lower energy costs, apart from reducing labour force. We note that part of the benefits from its cost-rationalisation exercise has started kicking in since the third quarter of financial year 2015 ended Sept 30, 2015 (3QFY15), and full benefits from the exercise will be seen by end-FY16.
The cost-rationalisation exercise apart, Evergreen Fibreboard Bhd’s move to expand its product range (ready-to-assemble [RTA] furniture via investment in a new production line) will start contributing to its bottom line by the second half of FY16. We understand that Evergreen could potentially expand capacity of the RTA production line, pending feedback from its customers.
Risks include escalating raw material and labour costs, slower-than-expected demand for medium-density fibreboards, fluctuating foreign-currency movement (in particularly, the US dollar) and a slower-than-expected turnaround in its particle-board operations.
FY15 to FY17 net profit forecasts are raised by 6.3% to 21.9%, largely to account for a higher US dollar/ringgit assumption of RM3.85 and RM4 per US dollar (from RM3.80 and RM3.70 per US dollar) for FY16 and FY17 respectively, as well as contributions from the RTA line.
Positives include it being a beneficiary of the strong US dollar and low oil prices; its healthy balance sheet; and the fact that its rubber plantation land bank value has yet to be reflected in its current share price valuation. We maintain our “buy” recommendation on Evergreen, with a higher TP of RM2.75 (from RM2.53 previously), as we raise our earnings forecasts and roll forward our valuation-base year to FY17 (from FY16). Our TP of RM2.75 is based on 11 times FY17 revised earnings per share of 25 sen. We continue to like Evergreen for its strong earnings visibility, underpinned by a strong US dollar (against the ringgit) and low key input prices, as well as management’s ongoing efforts to further improve its operational efficiencies and expand its product range. — Hong Leong IB Research, Jan 15
EVERGRN (5101) - Evergreen’s RTA furniture to contribute from 2HFY16
http://www.theedgemarkets.com/my/article/evergreen%E2%80%99s-rta-furniture-contribute-2hfy16
EVERGRN, EVERGRN (5101), 5101, EN5101, KLSERE:EVERGRN, Investing, Hong Leong Research,
