CIMB Research retains Add for Evergreen

KUALA LUMPUR: CIMB Equities Research is retaining its Add for Evergreen Fibreboard at the current price of RM1.16 with an unchanged target price of RM2.02.

The research house said on Monday Evergreen’s 1QFY16’s core net profit of RM26.5mil was 21% of its full-year estimate, which was in line as 1Q which was seasonally weaker.

“The sudden strengthening of the Ringgit against the US$ in March and Middle East volume declines dragged margins down on-quarter,” it said. “Evergreen is likely to track US$/Ringgit expectations in the short term. Maintain Add and target price. A potential catalyst is Ringgit weakness,” it said.

Revenue tracked expectations. However, EBITDA margin fell 300 basis points on-quarter from 20% to 17% as 1) pricing in the Middle East declined by about 5%, and 2) the Ringgit strengthened unexpectedly against the US$ in March. This was mitigated by sales of higher-margin boards. 

Evergreen has switched away from the lower-end Middle East customers in favour of Asean orders. In addition, 1Q is a seasonally weaker quarter due to the Chinese New Year festivities.

Evergreen’s balance sheet remains healthy as net gearing fell marginally from 8% to 7% on-quarter and it has resumed its 25% dividend payout policy from FY16. Shareholders have also approved the mandate to renew its share buyback programme. 

CIMB Research views this positively as management was, in the past, not able to undertake share buybacks during periods of share price weakness. In contrast, Hevea’s ability to buy back its shares provide signal value and share price stability, which Evergreen will now be able to do.

The last three months has seen a sell-down due to the sudden strengthening of the Ringgit. As a leveraged US$ play, Evergreen’s shares have suffered. It has since recovered, in line with the US$ strengthening above RM4. We believe that Evergreen’s share price performance is likely to track US$/Ringgit expectations until the new capacity for its various restructuring initiatives (new particleboard line, furniture line) come through in late 2016-early 2017.

“Forex risk poses the largest risk to earnings as 70% of Evergreen’s revenues are US$-denominated. Our sensitivity analysis suggests that every 1% increase in the value of the RM decreases FY16 EPS by 10%. However, as the Ringgit has since strengthened to above RM4 to the US$, we expect 2Q results to improve sequentially.

“We maintain our Add rating and target price, which is still based on an FY17 P/E of 12.5 times (sector average). Given the volatility in the Ringgit /US$ exchange rate, we prefer Heveaboard for exposure to the furniture sector as 1) Hevea is net cash and is likely to increase dividend payout substantially, and 2) Hevea’s niche E0 and super E0 particleboards are less susceptible to pricing pressure,” said CIMB Research.