Stock Name: EVERGRN
Company Name: EVERGREEN FIBREBOARD BHD
Evergreen Fibreboard Bhd
(June 20, RM1.15)
Maintain underperform at RM1.14 with revised fair value of RM1.16 (from 92 sen): Evergreen's average rubberwood log costs escalated by 21% year-on-year in 2010 as a result of a reduction in supply, largely thanks to rising latex prices as well as the bad weather conditions in 2HCY10.
The high rubberwood log costs have persisted so far into 2011 with the current average cost (up to April) actually 24% higher than FY10's average. The management believes that current rubberwood log costs have more or less reached their peak, and feels they are more likely to trend down due to an expected increase in rubberwood log supply as a result of improving weather conditions.
Glue cost was quite stable throughout 2010, and only started to escalate towards the end of the year. In line with the higher crude oil prices in early 2011, average glue cost (up to April) has increased by 15% compared with 2010's average.
The average increase in glue cost for FY11 ending December will likely be lower, as crude oil prices have since April started to ease off from their highs to the current level of US$116 (RM353.80) per barrel.
To mitigate the cost pressure on margins, Evergreen has been raising the average selling price (ASP) of its medium density fibreboard'' (MDF) products by US$5 per cu m consecutively each month since January. The management said the planned hike in ASP is only halfway through and it will need to hike prices by another US$15 to US$20 per cu m to fully mitigate the increase in raw material costs. This is not expected to be an issue, as the management said its customers have been more receptive to the higher ASP because the increases have been gradual.
The management has assured that it will maintain its 30% dividend payout ratio, which translates to a net dividend payout of about four sen per share based on our FY11 earnings per share forecast of 13.5 sen and a net yield of 3.5%.
The risks include: (i) sharp drop in MDF price; (ii) sharp increase in log costs; (iii) escalation of crude oil-related glue and logistics costs; and (iv) further strengthening of the ringgit which could reduce the company's export competitiveness.
We raise our FY11 to FY13 earnings forecasts by between 3% and 7% after raising our ASP and rubberwood log cost assumptions.
We believe further headwinds ahead for the MDF industry, such as high raw material costs and the strengthening of the ringgit against the greenback will continue to weigh on Evergreen's share price performance.
Post earnings revision, and after rolling forward our valuation base year, we now value Evergreen at RM1.16 (from 92 sen previously) based on an unchanged target price-earnings ratio of seven times FY12 earnings, in line with its five-year average historical PER. We maintain 'underperform'. ' RHB Research, June 20
This article appeared in The Edge Financial Daily, June 21, 2011.
Company Name: EVERGREEN FIBREBOARD BHD
| Research House: RHB | Price Call: SELL | Target Price: 1.16 |
Evergreen Fibreboard Bhd
(June 20, RM1.15)
Maintain underperform at RM1.14 with revised fair value of RM1.16 (from 92 sen): Evergreen's average rubberwood log costs escalated by 21% year-on-year in 2010 as a result of a reduction in supply, largely thanks to rising latex prices as well as the bad weather conditions in 2HCY10.
The high rubberwood log costs have persisted so far into 2011 with the current average cost (up to April) actually 24% higher than FY10's average. The management believes that current rubberwood log costs have more or less reached their peak, and feels they are more likely to trend down due to an expected increase in rubberwood log supply as a result of improving weather conditions.
Glue cost was quite stable throughout 2010, and only started to escalate towards the end of the year. In line with the higher crude oil prices in early 2011, average glue cost (up to April) has increased by 15% compared with 2010's average.
The average increase in glue cost for FY11 ending December will likely be lower, as crude oil prices have since April started to ease off from their highs to the current level of US$116 (RM353.80) per barrel.
To mitigate the cost pressure on margins, Evergreen has been raising the average selling price (ASP) of its medium density fibreboard'' (MDF) products by US$5 per cu m consecutively each month since January. The management said the planned hike in ASP is only halfway through and it will need to hike prices by another US$15 to US$20 per cu m to fully mitigate the increase in raw material costs. This is not expected to be an issue, as the management said its customers have been more receptive to the higher ASP because the increases have been gradual.
The management has assured that it will maintain its 30% dividend payout ratio, which translates to a net dividend payout of about four sen per share based on our FY11 earnings per share forecast of 13.5 sen and a net yield of 3.5%.
The risks include: (i) sharp drop in MDF price; (ii) sharp increase in log costs; (iii) escalation of crude oil-related glue and logistics costs; and (iv) further strengthening of the ringgit which could reduce the company's export competitiveness.
We raise our FY11 to FY13 earnings forecasts by between 3% and 7% after raising our ASP and rubberwood log cost assumptions.
We believe further headwinds ahead for the MDF industry, such as high raw material costs and the strengthening of the ringgit against the greenback will continue to weigh on Evergreen's share price performance.
Post earnings revision, and after rolling forward our valuation base year, we now value Evergreen at RM1.16 (from 92 sen previously) based on an unchanged target price-earnings ratio of seven times FY12 earnings, in line with its five-year average historical PER. We maintain 'underperform'. ' RHB Research, June 20
This article appeared in The Edge Financial Daily, June 21, 2011.
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