FUND managers’ picks
Yeoh Keat Seng
Senior fund manager
Kumpulan Sentiasa Cemerlang Sdn Bhd
EVERGREEN FIBREBOARD BHD
Current share price: RM1.24
THERE are a number of reasons to the appeal of Evergreeen Fibreboard, one of the top five producers of medium density fibreboard (MDF) in Asia.
The MDF sector is turning around after suffering from over-capacity over the last five years, the consequence of massive capacity build-up following the Chinese government’s unprecedented 4 trillion yuan stimulus in 2008. It is not only Evergreen that is turning around (3Q and 4Q returned to the black after seven consecutive quarters of red ink) but the sector-wide recovery is also reflected in the financials of peers; Vanachai of Thailand and Dongwha Enterprise of Korea, both of whom have turned profitable since 1Q14. Their share prices have skyrocketed by 5x to 6x from their December 2013 low, while their FY15 valuations have rerated sharply to ~16x PE and 9x – 12 EV/EBITDA.
Evergreen’s stellar RM20.1mil 1Q15 earnings (4Q14 RM14.6mil, 3Q RM10.1mil) confirmed that it is firmly on the road to generating a level of profitability more commensurate with the scale of its operations. The main contributors to the recovery were: improving average selling prices, lower raw material costs, better plant efficiency after upgrades, and the benefit of a weak ringgit. We estimate that the company is currently trading on FY15 PE of only 8x.
We believe the timing of entry into Evergreen is good, as the company’s significant lag behind the sector’s recovery means that earnings momentum is still going strong. Its cost of rubberwood, the main raw material, was substantially inflated by its high-priced logging concession acquired during the peak of the last cycle. However, with the cost of the concession fully written down last year, raw material cost has normalised, enabling the company’s margins to belatedly benefit from the sharp drop in rubberwood prices over the past few years. Industry recovery aside, management has also undertaken measures to enhance the group’s profitability, including upgrading the Segamat and Batu Pahat plants, and relocating the Johor Baru plant to Palembang, Indonesia. Coupled with the benefits of a strengthening US dollar vs the ringgit (the group has net exposure to the US dollar in which 70% of its sales are denominated), we project earnings will surge from breakeven in FY14 to RM77mil, RM102mil and RM120mil in FY15, FY16 and FY17 respectively.
The main risks of investing in Evergreen are: a downturn in the MDF industry due to over-investment or other reasons, a surge in raw material price, and management failure to execute plans to further improve profitability. The upside though will be a sharp decline in competition should the China producers drop out if the tax rebates that subsidise their exports is not renewed.
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