Evergreen to benefit from higher MDF demand, product prices

by ANIS HAZIM / pic credit: evergreengroup.com.my

EVERGREEN Fibreboard Bhd managed to stay profitable with a net profit of RM2.7 million in the second quarter of 2021 (2Q21) against a net loss of RM10.5 million last year despite a one-month closure of its Malaysia operations in June.

Hong Leong Investment Bank (HLIB Research) stated that the positive regional contributions had helped to cushion the losses suffered from Evergreen’s Malaysian operations during the quarter.

“Particularly noteworthy is its operation in Thailand which had been loss-making since 1Q19 saw a turnaround in 2Q21 with a price before tax of RM4.2 million,” HLIB Research analyst Tan Kai Shuen noted.

According to Tan, the group’s medium-density fibreboards (MDF) segment enjoyed brisk demand increasing average selling price (ASP) by 20% year-on-year (YoY) in 2Q21.

“This was driven by the easing of the MDF oversupply situation in the South-East Asia region as supply surplus is gradually absorbed by the market, and increase in demand from the Middle East market due to restocking activities in view of the global containers shortage,” Tan said.

Evergreen’s local operations are expected to resume operations in early September, which allows Evergreen to start rebuilding its orderbook.

“Management is positive that sales volume will pick up swiftly post-business resumption. The ready-to-assemble (RTA) segment in Malaysia continues to benefit from strong demand from the US as a result of its trade friction with China.

“Expansion in the capacity of RTA is currently limited by the supply of foreign labour. However, once there is relaxation of foreign labour intake restrictions, there is potential to scale up contribution from RTA going forward,” Tan added.

The group’s Thailand unit is seeing gradual improvement in earnings due to the increase in MDF export demand and overhead cost reduction from the improvement in its production efficiency.

“Post refurbishment of the boilers in its power plant, we expect better production efficiency and reduced maintenance cost.

“The group is also scaling up its production, which we expect will contribute an additional capacity of 20% to its Thailand operations from the financial year of 2022 (FY22) onwards,” stated Tan.

Evergreen also spent RM33.2 million to increase its stake in its Indonesia’s subsidiary PT Hijau Lestari Raya Fibreboard from 51% to 99.99% in November 2021 as they see potential in the Indonesian market.

“This is due to the underdeveloped furniture market in Indonesia, competitive cost structure, favourable pricing as sales in Indonesia are denominated in USD while costs are priced in local currency and it has a private jetty to ship its wood products,” noted Tan.

The analyst views the recovery path for Evergreen in the FY21 was unfortunately marred by the Covid-19 headwinds that resulted in production downtime and foreign labour shortage in Malaysia.

“Its operation hiccups such as power plant breakdowns and rising raw material costs pose further speed bumps to its recovery trajectory.

“Nonetheless, we opine that the worst may be over for Evergreen with a vaccinated workforce, the risk of a workplace Covid outbreak will now be better managed as Malaysia is moving towards the new norm of living with the endemic,” said Tan.

HLIB Research maintained its FY21 earnings forecast and raised its FY22/FY23 figures by 37.6%/30.4% to account for higher ASP and demand in the MDF export segment as well as the additional capacity from Thailand operations.

The analyst maintained a ‘Buy’ call on Evergreen with an unchanged target price of 67 sen pegged to price-to-book multiple of 0.5 times based on FY21 book value per share.