转贴;Evergreen Fibreboard: Better days ahead

JULY 24, 2015, 7:30 AM

StockStalk instory imageAfter a tumultuous FY13-14 which saw the group posting heavy losses, the engineered wood-based product manufacturer’s turnaround story is deemed an extraordinary one, driven by favourable external environment and strong fundamentals. Are better days waiting ahead and will the group finally see evergreen again?
Business model: Incorporated in the year 1991, engineered wood-based product manufacturer Evergreen Fibreboard Bhd (EVF) has subsequently made its debut on Bursa Malaysia’s Main Market on March 11, 2005.
The group engages principally in the business of manufacturing medium-density fibreboards (MDFs), and today counts itself as one of Asia’s leading players in the industry with a production capacity of up to 1.3 million cubic metre of MDFs per annum, alongside players like Thailand’s Vanachai Group and South Korea’s Dongwha Enterprise.
EVF has 10 MDF production lines and one particleboard production facility spread across Malaysia, Thailand, and Indonesia. Over the years, it has diversified its clientele base to include over 600 customers across more than 40 countries globally, whilst deriving no more than 10% of its topline from one single client.
EVF also operates, on a smaller scale, the manufacturing of particleboard and ready-to-assemble furniture. It also caters to its own glue requirements from its adhesive facilities based in Batu Pahat, Johor and Gurun, Kedah, while possessing 4,400 acres of rubber plantation land in Johor.
EVF’s earnings were severely dented in financial year 2012 to financial year 2014 (FY12-14), as a result of the group being overly aggressive in bidding for high-priced rubber-logging concessions in between 2011 and 2012. When rubber prices fell sharply, EVF was left holding high-priced rubberwood inventories until the second quarter of financial year 2014, and was compelled to write off up to RM20 million in inventories in FY13 and FY14 each.
Shareholders and management: EVF was established by Kuo Wen Chi, now aged 81, who still sits on the company’s board as non-independent deputy chairman. The management and operation of the group are succeeded by his sons, Kuo Jen Chang, aged 52, who is the chief executive officer; and Kuo Jen Chiu, aged 49, who is the chief operating officer.
Jen Chang oversees the group’s operations in Thailand, while Jen Chiu, is tasked with both operations in Malaysia and Indonesia. Collectively, the Kuo family holds a controlling stake of 45% in EVF.
Evergreen Fibreboard Berhad 1-year price chart 230715 01Share price performance: EVF’s share price has been steadily going on an uptrend since the beginning of the year in January, alongside the strengthening greenback, as up to 70% of EVF’s export revenue is denominated in US dollar, with the remaining 30% denominated in local currencies of its operating countries.
Sensitivity analysis conducted by CIMB Research also indicated that a 1% strengthening of the US dollar is likely to increase EVF’s FY15 earnings per share by 10%.
EVF closed on July 23 at RM2.01, up 3 sen.
EVF has a dividend policy of distributing 20% to 50% of profits as dividends. However, this practice was suspended in FY13 and FY14 due to the company’s heavy losses. In lieu with its turnaround, CIMB Research forecasts a resumption in dividend payout to 20% to 22% in FY16-17 and a nominal dividend of 1 sen per share in FY15.
What analysts think: Dubbing EVF an “exciting turnaround story”, CIMB Research foresees many tailwinds playing to the group’s favour, all of which could potentially propel earnings before interest, taxes, depreciation and amortisation from 4% in FY13 to 22% in FY17.
The prospects, according to CIMB Research, will be driven primarily by the strong-performing US dollar, sharply lower raw material costs for rubberwood logs and glue, falling freight cost, and the benefits of internal restructuring exercise being implemented by the group.
“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 FY16-17’s earnings.
“In addition, we expect EVF to dispose of its non-core assets, which could raise up to RM110 million in cash (21 sen per share) and could be used to pare down debt and/or raise dividends,” said CIMB Research in its report published on July 20.
Altogether, the research house forecasts that EVF’s strong earnings recovery may see the group registering net profit by up to 500-fold to RM83 million, compared to a mere RM0.2 million last year, and the group achieving a net cash position by end-2017.
It is also expected that, by FY17, when EVF’s integrated plant in Segamat is ready, earnings is likely to be further boosted by the additional profit contribution from high-margin particleboards and pellets, added CIMB Research.
Convinced that the stock is “still cheap”, CIMB Research initiated a “buy” call on EVF at a target price of RM2.90, at 12.5 times FY16 price-earnings (P/E), a 20% discount to larger-cap peer, Vanachai Group which is trading at 15 times FY16 P/E.
Earnings forecast:
Peer comparison: 
StockStalk: After posting extraordinary turnaround, it really seems as though better days are ahead for Asean’s largest MDF producer with a favourable external environment.
While the winds may not always blow on the same side, some associating risk factors to consider include fluctuations in foreign exchange rates, raw material prices, labour and electricity costs, as well as MDF prices.
The fact that the bulk of EVF’s earnings are denominated in the US dollar makes it susceptible to fluctuations of the greenback. While being a beneficiary of the strong US dollar, a sharp depreciation of the greenback could similarly play to its disadvantage by posing a negative impact on profit margins of the group.
Investors, though, could be assured with the fact that the turnaround is not solely dependent on external factors, but also coupled with the fact that expansion in the group’s margins is also partly owing to its internal restructuring moves, through the shutting down of unprofitable plants, procurement of newer equipment, and expanding capacity of profitable segments of its business.
While proving that the grasses are indeed not necessarily greener on the other side, those who have yet to stake a claim on the homegrown MDF producer may want to pick up the stock while it trades below fair value at RM2.90.
2015-07-26 19:24