Evergreen Fibreboard - Affected By Exchange Rate Woes

Fair Value : RM0.95 | Recom : Outperform

Below expectations. Evergreen’s 1HFY12/12 net profit came in below our and consensus expectations, accounting for 35-40% of full-year forecasts. The main variances came from lower-than-expected EBIT margins of 7.7% in 1HFY12, versus our projections of 11-12% for FY12, likely due to higherthan- expected glue costs and the impact of the weakening RM against the US$ in 2Q12 to RM3.114/US$ (-1.7% vs 1Q12 and -3.1% vs 2Q11), which affected unhedged costs. In our forecasts, we have based our assumptions on RHBRI’s official forecasts of RM3.00/US$ for FY12.

1HFY12/12 net profit rose 75% yoy on the back of revenue increase of 13%. The rise in revenue was mainly due to higher average selling prices in all three countries as well as higher sales volumes. The relatively higher net profit increase was due to the turnaround of its Thai operations which recorded a PBT of RM10.3m in 1H12 from a loss of RM6.4m in 1H11, partially as a result of lower log costs in Thailand.

Risk. The risks include: 1) sharp decrease in MDF price; 2) sharp increase in log costs; 3) significant increase in crude oil related glue and logistics costs; and 4) stronger-than-expected strengthening of the ringgit.

Forecasts. We are disappointed with Evergreen’s results, as we had expected the culmination of improved sales volumes and higher utilisation rates (above 80% in 2Q12 from about 78% in 1Q12) and the impact of lower log costs to result in better 2Q results. However, this did not happen due to the weakening RM which affected unhedged costs, as well as stubbornly high glue costs. We are therefore revising our forecasts downwards to adjust for: (1) weaker RM:US$ assumption of 3.05 (from 3.00) for FY12, after taking into account the average exchange rate recorded in 1H12 of 3.09; and (2) higher glue costs for FY12-14 (+5-10% from +0-5% yoy). All in our forecasts have been revised by -24.3% for FY12 and -15.3-15.6% for FY13-14.

Investment case. Post-earnings revision and after reducing our target PE valuation to 6x CY13 (from 7x), based on the low-end of its historical PE band, our target price has been cut to RM0.95 (from RM1.35). Despite the downgrade in earnings, valuations for Evergreen remain at inexpensive levels of 6x FY12 and 5x FY13, below the low-end of its historical PE band. We believe that we have already imputed in sufficient downside risks to earnings, with the exception of further changes in the exchange rate, and that things should improve from here on. As such, we maintain our Outperform recommendation on the stock.

Source: RHB Research - 14 August 2012