Small-Cap-Corner: Evergreen's production, prices surge

30 Jul 2007: Small-Cap-Corner: Evergreen's production, prices surge


Evergreen Fibreboard Bhd manufactures medium-density fibreboard (MDF), particleboard and knocked-down wooden furniture. It is one of the top five MDF producers in Asia, with a total capacity of 800,000 cubic metres per annum. Evergreen exports 82% of its total production to countries such as China, Vietnam and the US and has more than 500 customers worldwide.
Since MDF and particleboard are substitutes for plywood, strong plywood prices will increase the demand and selling prices of the two products. Furthermore, MDF is considered to be more environment-friendly as its input consists of rubberwood rather than logs.

With its recent expansion into Thailand and Indonesia where raw material (rubberwood) is abundant, the company is expected to increase its total production and gain a bigger market share in the next few years. Evergreen is setting up a new MDF production line in Thailand with a production capacity of 250,000 cu m per annum. The new line - which has been granted pioneer status for eight years, exempting its profit from tax - is expected to start production in the second half of financial year 2008.
Its recent venture into Indonesia is through a 51:49 joint venture with Indonesia's PT Hijau Lestari Jaya Fibreboard, which owns an MDF plant that produces 110,000 cu m per annum and an adhesive plant with a capacity of 50,000 tonnes per annum. Both plants are expected to start production in November. Production from Indonesia and the new Thai line will increase Evergreen's total MDF production from 800,000 cu m per annum to 1.16 million cu m by end-2008.
Evergreen is also expanding its supporting activities. A new biomass power plant scheduled for completion in December and a new glue resin plant in Malaysia scheduled for completion in February 2008 will result in cost savings of RM25 million per annum. The company is also looking to acquire 10,000 acres of acacia land to secure the supply of its raw material. The capital expenditure for this acquisition is expected to be around RM15 million to RM20 million.
The company will continue to increase its production capacity through organic expansion and mergers and acquisitions. The company is also looking to increase its exports to the Middle East. Though there may be a short-term weakness in MDF and plywood prices, the long-term outlook remains bright as demand is likely to outstrip the supply of limited wood resources.

At RM1.71, the company is currently trading at a price-earnings ratio of only 7.2 times based on FY2007 ending Dec 31 forecasted earnings per share of 23.6 sen derived by annualising 1QFY2007 net profit. Note that the consensus net profit forecast for FY2007 is only RM81.2 million compared with RM113.6 million if 1Q2007 results are annualised.
Despite the Johor floods, which affected production, Evergreen's 1QFY2007 net profit surged 181% to RM28.4 million due to a year-on-year rise in MDF prices by around 30% and contribution from its newly acquired MDF plant. Production levels in 2Q should be higher, while FY2008 production will be boosted by additional production from the Indonesian and Thai MDF plants. Hence, earnings in subsequent quarters should rise even if MDF prices moderate.
Even though Evergreen's production cost is 10% to 15% lower than those of its European competitors, it is trading at a significant discount in PER terms. With its current expansion plan and high net profit margin, the company is looking at an average growth rate of 25% to 30% per annum for the next three years. Pegging Evergreen at a PER of 10 times and assuming an FY2007 EPS of 23.6 sen imply that the company could be worth RM2.79, 63% higher than its current share price.
Disclosure: Kumpulan Sentiasa Cemerlang or its staff may own shares in the securities mentioned.

Choong Khuat Hock is head of stock research and a partner at Kumpulan Sentiasa Cemerlang Sdn Bhd, a fund management company