by NURUL SUHAIDI / pic by TMR FILE

EVERGREEN Fibreboard Bhd’s business recalibration has begun to pay off, resulting in increased efficiency and lower production cost, according to Hong Leong Investment Bank Bhd (HLIB Research). 

“The recalibration process result has strongly positioned the company to profit from the current upcycle in the panel board market,” HLIB Research analyst Tan Kai Shuen wrote in a report on the company on Monday. 

He added investors’ interest in the stock has been renewed as a result of the robust rebound in fourth quarter of financial year 2021 (FY21) performance and associated run-up in share price (+47.1% year to date). 

HLIB Research maintains a ‘Buy’ call on Evergreen Fibreboard with an unchanged target price of 94 sen a share based on 12 times price-to-earnings of FY22 earnings per share 7.8 sen. Evergreen Fibreboard shares closed one and half sen lower at 60.5 sen yesterday. 

“We continue to favour Evergreen Fibreboard for its integrated business segments, diversified production bases across three countries (Malaysia, Thailand and Indonesia) and broadening export markets,” he added. 

Evergreen Fibreboard also offers a good proxy for export play given that more than 50% of its revenue is denominated in US dollars while costs are mainly in local currencies. 

Despite the longer shutdown period in Malaysia last year, the group recorded a core net profit of RM27.8 million compared to RM26.1 million in FY20. 

“The improvement was largely attributed to gross profit margin expansion to 20.6% from 14.7%,” the analyst added. 

Evergreen Fibreboard has come a long way and transformed itself from a medium density fibreboard (MDF) producer into an integrated player with three key business segments, such as MDF, particle-boards (PB) and ready-to-assemble (RTA) furniture. 

It has its own glue plants in Gurun, Kedah, and Batu Pahat, Johor, each having a manufacturing capacity of 96,000 metric tonnes, allowing Evergreen Fibreboard to maintain supply continuity, faster time to market and better cost management. 

For its Thailand operations, the group continues to see strong export demand from the Middle East supported by a pickup in consumer spending on furniture in the region. 

The less-developed processed wood manufacturing in Indonesia enables the group to market MDF in Indonesia with sales denominated in US dollar while cost is in local currency, giving it a superior profit margin. 

Among the three market regions, Indonesia has the highest profit before tax margin among all. The operation is further enhanced by its own operated jetty (production based in Palembang, Sumatra) which facilitates sales to other parts of Indonesia. 

In Malaysia, Evergreen Fibreboard is enjoying a homebase advantage as it supplies bulk of its MDF and PB to the furniture producers in Muar, Johor. 

“Because of its factories’ proximity to Muar furniture producers, as well as increased transportation costs related with higher crude oil prices, it is more competitive than Thailand producers who were previously Muar’s main suppliers,” the investment bank report noted. 

The group MDF and PB segment will continue to enjoy the strong demand from Malaysian furniture makers due to the trade diversion from China to the South-East Asia region amidst US-China trade friction. Likewise, this will also benefit its RTA segment. 

“As the demand will remain strong, we believe the demand for Evergreen Fibreboard’s products MDF, PB and RTA will remain well supported given that reason,” he said. 

The work from home trend that bolsters the home office furniture demand in the US also complements Evergreen Fibreboard production. 

The rising trend in buying furniture online has led to the rise in popularity for lightweight or RTA furniture that are easier and cheaper to deliver. 

Evergreen Fibreboard, however, remains cautious that glue costs may rise again in view of current high crude oil prices despite some easing from its peak in December 2021. 

“Labour management also poses a key challenge. The group has thus automated most of its production processes in its processed wood of MDF and PB,” HLIB Research revealed. 

The RTA business is an exception due to tailored orders and the need for labour for packaging. 

With the government in the process of relaxing foreign worker admission, this will make it easier for Evergreen Fibreboard to manufacture more RTAs for sale.