Hume acquisition a boost for Evergreen

18-07-2008: Hume acquisition a boost for Evergreen

EVERGREEN Fibreboard Bhd's (EFB) proposed acquisition of Hume Fibreboard is a boost for the company in more ways than one, HwangDBS Vickers Research said.

"We are positive on the proposal as it will expand EFB's capacity by 23%, enlarge its global market share and reduce competitive pressures," the research house said in a revent note.

Hume Fibreboard could lift Evergreen's FY2009-2010 earnings per share by 9% despite an enlarged capital base, it added.

"We estimate that Hume could add around RM190 million to RM210 million to Evergreen's annual turnover, based on a utilisation rate of between 85% to 90% and 60% thin medium-density fibreboard (MDF) production. This could raise our FY2009-2010 net earnings forecasts by 16-17% or an additional RM21 million to RM23 million a year," it said.

This assumes that 75% of the RM170 million cash payment to Hume Industries Bhd is financed by debt, which could turn Evergreen into a net debt position of RM98 million from RM50 million net cash in FY2009.

Evergreen, HwangDBS said, planned to grow Hume Fibreboard by introducing the production of thin MDF panels that commands better margins. It also enhances cost efficiency by consuming Evergreen-produced glue as well as via better sourcing of wood.

"We believe there is room for Hume Fibreboard to grow given the company's current thin margin. In FY07, we understand that it achieved about 9% net margin (on the back of RM18 million net profit) versus Evergreen's margin of 16%. We expect Hume Fibreboard to make a net profit of RM21 million in FY09 and RM23 million in FY10," HwangDBS said.

The research house also reckoned there is room for Evergreen to pay higher dividend as the acquisition is expected to be earnings accretive.

"Based on a 30% payout ratio, additional contribution from Hume Fibreboard could potentially raise dividend per share to 8.5 sen in FY09 and nine sen in FY2010, representing a 7% net yield a year, up from our forecast of eight sen a year," Hwang-DBS said.

It maintained a buy recommendation with a RM2.15 target price for Evergreen, based on eight times 2009 earnings.

"We continue to like Evergreen as it is well positioned as the second largest MDF player in Malaysia. Malaysia is the world's second-largest MDF exporter. Evergreen offers attractive net dividend yield of 6% and is currently trading at a compelling five times calendar year 2009 earnings.

"Catalysts for the stock include growth in MDF volume, higher selling prices and cost savings from producing its own glue and energy," HwangDBS said.

It will impute the acquisition in its forecast once it is completed. The proposed deal is still pending shareholders' and authorities' approval.

The research house expects Evergreen to be on track to meet its full year forecast.

"We expect 2Q08 net profit to be similar to 1Q08 as MDF prices remain flat quarter-on-quarter. Earnings would also include partial contribution from the group's new glue plant in Johor and power plant in Thailand, which kicked in May this year," it added.

Evergreen was untraded yesterday. It last closed at RM1.31.