August 18, 2010

EVERGRN - Evergreen Fibreboard's stellar results due to higher ASP, improved efficiency

Stock Name: EVERGRN
Company Name: EVERGREEN FIBREBOARD BHD
Research House: RHB

Evergreen Fibreboard Bhd
(Aug 17, RM1.59)
Maintain outperform at RM1.55 with higher fair value of RM2.67 (from RM2.30)
: Evergreen's 1HFY12/10 net profit of RM69.6 million came in above our and consensus expectations, accounting for 64% of our and 63% of consensus expectations respectively. Key variances to our earnings were higher average selling price and a better earnings before interest and tax (EBIT) margin (17.3% in 1HFY12/10 against our full-year forecast of 14.1%) arising from improved efficiency. As expected, two sen interim tax-exempt dividend was declared during the quarter, bringing total dividend declared year-to-date to four sen.

Year-on-year (y-o-y), net profit increased by more than 100%, mainly driven by: (i) 43.1% increase in revenue due to higher average selling prices and sales volume as demand recovered strongly in 1H2010 after the global economic downturn last year; and (ii) expanding profit margins due to the higher capacity utilisation rate together with synergistic savings derived from its power plants in Thailand and its glue plant in Batu Pahat.

Quarter-on-quarter (q-o-q), average selling price has improved by approximately 4% in US dollar terms (from US$249/m3 in 1Q2010 to US$259/m3 in 2Q2010).

However, this was largely offset by a stronger ringgit. Nevertheless, net profit was still higher by 10.3% q-o-q as a result of improved operational efficiency and cost savings.

The risks include: (i) sharp drop in MDF price; (ii) sharp increase in log costs; (iii) further escalation of crude oil related glue and logistics costs; and (iv) strengthening of the ringgit which could reduce the company's export competitiveness.

We have revised upwards our earnings forecasts for FY12/10-12 by 7.6%-21.6% after: (i) raising our average selling price assumptions by 3.9%-6% for FY2010-12; (ii) lowering our operating and administration and finance cost assumptions slightly to be in line with 1H results; and (iii) raising our effective tax rates to 13% for FY2010-12 (from 7.8%-9.4%) to be in line with 1H results.

Post-earnings revision, we raise our fair value for Evergreen to RM2.67 (from RM2.30), based on unchanged target PER of 10 times FY12/11 earnings (which is at a two times PER discount to the timber sector).

We maintain our 'outperform' recommendation on the stock. ' RHB Research Institute, Aug 17


This article appeared in The Edge Financial Daily, August 18, 2010.


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