Stock Name: EVERGRN
Company Name: EVERGREEN FIBREBOARD BHD
Research House: RHB
Evergreen Fibreboard Bhd
(June 2, RM1.43)
Maintain outperform at RM1.43 with a lower fair value of RM2.30 (from RM2.35): Evergreen expects 2Q10 results to be stronger by circa 5% quarter-on-quarter, due mainly to higher sales volume coupled with higher average selling prices. Its current capacity utilisation rate is above the 80% level while average selling prices have since strengthened by 3% in 2Q10 versus 1Q10. Total cost of production has dropped by 2.5% in 2Q10.
Evergreen will be commissioning its currently dormant Indonesian plant in 2H10. To be conservative, we have only assumed contributions from Indonesian operations to start from FY11 onwards. If the plant is commissioned on time in 2H10, this would potentially raise our FY10 forecast by 5%.
Evergreen expects growth to mainly come from an improvement of market share in the region as well as reduction in cost of production. Moving forward, Evergreen plans to grow both its Thailand and Indonesia market shares to 5% (from <2%) and 10% (from 6%), respectively in the near term.
We also believe that Evergreen may try to further reduce its cost of production through the securing of rubberwood log supply by acquiring rubber plantation land and/or the acquisition or commissioning of a third glue plant. Any acquisitions of existing MDF players would only take place earliest in 2012, if opportunities present themselves.
Given its stronger financial position currently, Evergreen highlighted that it may pay out more interim dividends in FY10 and FY11. Evergreen also targets to be in a net cash position by end-2011 (from 0.4 times net gearing currently). Following the management's commitment to paying out higher dividends in FY10-FY11, we have increased our net dividend payout assumption to 40%-45% in FY10-FY11 (from 25%), which would bring dividend, payouts back to '06 levels of 40% (before the acquisition of Takeuchi MDF and Hume Fibreboard). This translates to a very respectable 6%-7% net dividend yield for FY10-FY11 (from 3%-4% previously).
The risks to our view include: (1) sharp drop in MDF price; (2) sharp increase in log costs; (3) further escalation of crude oil related glue and logistics costs; and (4) strengthening of the ringgit which could reduce the company's export competitiveness.
We reduced our earnings forecasts by 1.4%-3.2% for FY10-FY12 per annum after updating our US dollar to ringgit assumptions; our FY09 numbers; and increasing our dividend payout assumptions.
Post earnings revision, we value Evergreen at RM2.30 (from RM2.35) based on unchanged target PER (price-earnings ratio) of 11 times FY12/10 earnings (which is at a three times PE discount to the timber sector due to its smaller market capitalisation). Maintain our outperform recommendation on the stock. ' RHB Research Institute, June 2
This article appeared in The Edge Financial Daily, June 3, 2010.
Company Name: EVERGREEN FIBREBOARD BHD
Research House: RHB
Evergreen Fibreboard Bhd
(June 2, RM1.43)
Maintain outperform at RM1.43 with a lower fair value of RM2.30 (from RM2.35): Evergreen expects 2Q10 results to be stronger by circa 5% quarter-on-quarter, due mainly to higher sales volume coupled with higher average selling prices. Its current capacity utilisation rate is above the 80% level while average selling prices have since strengthened by 3% in 2Q10 versus 1Q10. Total cost of production has dropped by 2.5% in 2Q10.
Evergreen will be commissioning its currently dormant Indonesian plant in 2H10. To be conservative, we have only assumed contributions from Indonesian operations to start from FY11 onwards. If the plant is commissioned on time in 2H10, this would potentially raise our FY10 forecast by 5%.
Evergreen expects growth to mainly come from an improvement of market share in the region as well as reduction in cost of production. Moving forward, Evergreen plans to grow both its Thailand and Indonesia market shares to 5% (from <2%) and 10% (from 6%), respectively in the near term.
We also believe that Evergreen may try to further reduce its cost of production through the securing of rubberwood log supply by acquiring rubber plantation land and/or the acquisition or commissioning of a third glue plant. Any acquisitions of existing MDF players would only take place earliest in 2012, if opportunities present themselves.
Given its stronger financial position currently, Evergreen highlighted that it may pay out more interim dividends in FY10 and FY11. Evergreen also targets to be in a net cash position by end-2011 (from 0.4 times net gearing currently). Following the management's commitment to paying out higher dividends in FY10-FY11, we have increased our net dividend payout assumption to 40%-45% in FY10-FY11 (from 25%), which would bring dividend, payouts back to '06 levels of 40% (before the acquisition of Takeuchi MDF and Hume Fibreboard). This translates to a very respectable 6%-7% net dividend yield for FY10-FY11 (from 3%-4% previously).
The risks to our view include: (1) sharp drop in MDF price; (2) sharp increase in log costs; (3) further escalation of crude oil related glue and logistics costs; and (4) strengthening of the ringgit which could reduce the company's export competitiveness.
We reduced our earnings forecasts by 1.4%-3.2% for FY10-FY12 per annum after updating our US dollar to ringgit assumptions; our FY09 numbers; and increasing our dividend payout assumptions.
Post earnings revision, we value Evergreen at RM2.30 (from RM2.35) based on unchanged target PER (price-earnings ratio) of 11 times FY12/10 earnings (which is at a three times PE discount to the timber sector due to its smaller market capitalisation). Maintain our outperform recommendation on the stock. ' RHB Research Institute, June 2
This article appeared in The Edge Financial Daily, June 3, 2010.
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