Citigroup reiterates "buy" on Evergreen Fibreboard

CITIGROUP has reiterated its "buy" call on medium density fibreboard maker Evergreen Fibreboard, despite a plant fire that could hurt its earnings for the year ending December 31 2007.

The recent fire at the Takeuchi plant damaged only the press section and not the entire production line.

However, damage to one of the production lines will likely result in Evergreen losing production capacity of 5,000 cu m per month for about three months.

It also assumed that Evergreen's earnings could be cut by RM13 million if production capacity drops by 10 per cent for three months and receives full insurance compensation in April to May of 2008.

Earnings loss, it said, will be booked into 2008 earnings upon recovering from insurance.

"To reflect the loss in production capacity in one of the lines for about three months, we are lowering our financial year ending 2007 estimated earnings by 10.2 per cent to RM112 million," Citigroup said.

"However, we think Evergreen continues to trade at attractive price to earnings valuations of 7.5 times of 2007 estimates and 5.1 times of 2008 earnings estimates.

"Three year compounded annual growth rate ranges from 34 per cent to 56 per cent over the next three years," the investment bank said.

Evergreen is the country's largest MDF maker and is expected to increase its capacity to 1.08 million cu m by the end of next year from 710,00 cu m by the end of 2007.

Citigroup rates Evergreen a "buy" and a target price of RM3.40, applying a sector average price earnings of 9.7 times.

"This is a significant discount to the 2008 estimate market price over earnings ratio of 14.4 times," it said.