Dear Readers
Today, we look into Evergreen Fibreboard Bhd (“Evergreen“).
Introduction
Evergreen is, for all intents and purposes, a manufacturer of medium density fibreboard (“MDF“),
so much so that MDF accounted to 80% of Evergreen’s revenue in FY2016.
Other than MDF, Evergreen also produces particle boards (“PB“) (15% of FY2016’s revenue) and ready-to-assemble furniture parts (“RTA“) (5% of FY2016’s revenue).
The main raw materials in the production of MDF are rubber wood,
derived from rubber trees, and resins, an adhesive substance. MDF is
produced by binding the fibres, which have been chipped off from rubber
wood, with resins, and to be pressed together to form a piece of board
with varying thickness.
Evergreen has about 8 operation sites located in Malaysia (Johor,
Negeri Sembilan and Kedah), Thailand and Indonesia. Resins are produced
in Batu Pahat, Johor, and Gurun, Kedah.
The main markets of Evergreen’s products are ASEAN countries and the
Middle East. Other notable markets include the USA, Europe and Far East
Asia.
Financials
| DATA | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 |
| REVENUE (RM’000) | 997,795 | 1,012,017 | 941,994 | 938,670 | 1,031,662 | 1,061,668 |
| PROFIT (RM’000) | 71,679 | 90,904 | 170 | -42,776 | 32,170 | 63,602 |
| OPERATING PROFIT (RM’000) | 100,228 | 118,941 | 16,367 | -35,147 | 40,272 | 76,830 |
| SHAREHOLDERS’ EQUITY (RM’000) | 1,124,019 | 1,038,285 | 801,655 | 786,172 | 825,820 | 818,710 |
| DEBT (RM’000) | 408,804 | 377,171 | 439,077 | 478,187 | 505,488 | 476,545 |
RATIO
|
||||||
| DEBT TO EQUITY | 0.36 | 0.36 | 0.54 | 0.61 | 0.61 | 0.58 |
| OPERATING PROFIT MARGIN | 0.10 | 0.12 | 0.017 | N/A | 0.039 | 0.07 |
| OCF RATIO | 0.86 | 0.44 | 0.26 | 0.11 | -0.10 | 0.50 |
| PROFIT MARGIN | 0.07 | 0.09 | 0.00 | N/A | 0.03 | 0.06 |
| EPS (CENTS) | 8.7 | 17.6 | 0 | -0.01 | 6.3 | 12.4 |
| EPS (ADJUSTED) CENTS | 8.4 | 10.9 | 0.02 | N/A | 3.8 | 7.51 |
| DPS CENTS | 2 | 1 | 0 | 0 | 4 | 0 |
| P/E | 11.1 | 13.4 |
2016.7 (this is not an error)
|
N/A | 9.3 | 7 |
| ROE (%) | 6.3 | 8.8 | 0.02 | N/A | 3.9 | 7.8 |
Between FY2011 and FY2016, Evergreen’s top line was flat; never far off
from the RM1 billion mark. In the same period, operating profit margin,
profit margin and EPS were a hit-and-miss. Only in FY2015 did Evergreen
perform exceptionally well as prices of resin and rubber wood were low
and therefore contributing to an increase in earnings.
The severe monsoon, at the tail-end of 2016, which ravaged most of
Indonesia, Malaysia and Southern Thailand, had disrupted production of
rubber wood and caused prices of rubber wood to soar thus reducing
profits. As a result, earnings were lower in FY2016, as compared to
FY2015, and the spill over from such also affected Evergreen’s earnings
for Q1 FY2017 (the last quarter). The lukewarm earnings were reflected
in Evergreen’s share price, which tumbled from a high of RM1.12 in
October 2016 to about RM0.870.
Adverse weather affected not only Evergreen but other wood-based
furniture players too. In anticipation of a reduction in rubber wood
supply, caused by the last monsoon season, Evergreen, prior to the
monsoon season, increased its inventory of rubber wood. However, such
mitigation is limited in its effectiveness because rubber wood can
generally be stored up to about 3 months after being harvested.
Even though adverse weather is a matter of concern, I reckon the main
grievances faced by Evergreen is the lack of a growth impetus as its top
line growth has become stagnated over the years.
Potentials
Evergreen reckons that the antidote for a stagnated growth is a major
restructuring exercise, which it has executed in phases, since 2015.
On top of capital expenditure, to upgrade plants and equipment and
increasing production lines, the company has also initiated cost-cutting
measures, which resulted in the closing down of non-performing
operation sites, such as a MDF operation site in Masai, Johor.
While the Masai operation area is being stripped down, and eventually,
to be put on sale, the equipment and plants from Masai will be relocated
to Evergreen’s Segamat operation site. Segamat, which houses
Evergreen’s PB production, has undergone refurbishment to accommodate
the receipt of equipment and plants from Masai. Furthermore, the current
PB production line in Segamat has been upgraded and modernized to
include the installation of Dieffenbacher pressing line from
Germany. Dieffenbacher pressing line aims to:
- substantially increase production of PB from 120,000 cubic metres per annum to potentially 550,000 cubit metres; and
- allow the production of PB of less than 10mm in thickness, which Evergreen was unable to produce before.
Having MDF and PB productions integrated under one roof would mean that
wastage from the production of MDF could be used in the production of
PB. This leads to less wastage in totality.
The relocation, refurbishment and upgrading is expected to reduce processing time and increase production capacity.
Another benefit of the restructuring is to enable Evergreen to
diversify away from MDF production. Evergreen intends to increase
production of value-added products which entails RTA lower-end
furniture. This can be seen from its investment in additional RTA
production lines which will see commercial action in 2H 2017. The
increase in PB production (which is the basic component of RTA lower-end
furniture) will synergise with Evergreen’s plan to increase RTA
furniture production.
Conclusion
I am liking the potential that will ooze from the restructuring
program. I reckon higher profit margin could be obtained by increasing
the production capacity of RTA furniture, which is where Evergreen is
heading. With existing expertise in RTA furniture production, I expect
that an increase in RTA furniture production will contribute positively
to its earnings in the future due to better profit margin in RTA
furniture.
As if nothing else can be more favourable to Evergreen, the Malaysia
government announced that, as of 1 July 2017, all export of rubber wood
from Malaysia will be banned. This aims to curb the shortage of supply
of local rubber wood and its effect is expected to lower the price of
rubber wood. Ultimately, Evergreen’s increased production capacity in
Malaysia will benefit from such policy.
Evergreen is not without its negative. Concern is warranted especially
with the economic slow down in the Middle East, the biggest contributor
to Evergreen’s revenue. The low crude oil price environment (the new
norm), although benefits Evergreen, in decreasing the production cost
of resins (the second largest cost component after rubber wood), will
affect the sales of Evergreen’s products in that region.
There is also mixed economic data coming out of the USA which points to
a economic slowdown, albeit positive outlook in Europe and Japan. Also
exacerbating the whole situation is the Feds’ adamant stance of hiking
interest rate at a time of economic weakness.
Disclosure
I am holding shares in Evergreen.
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