Evergreen ... Mar10

Evergreen Fibreboard Business Getting Better

Revenue came in-line with our expectations on the back of higher medium density fibre board (MDF) sales and improved cost efficiencies. However, bottom line earnings were above our estimates (+15%) in view of a tax overprovision last year.
Going forward, as we see Evergreen Fireboard (EFB) performing much better given i)
higher MDF sales volume and ii) higher MDF selling prices, we maintain our BUY
recommendation for the stock with a new target price at RM1.66 from RM1.62 previously.

Y-o-y better.
On the back of stronger MDF sales momentum, YTD revenue for EFB surged slightly by 5.7%. The key point to note however is its cost cutting measures have effectively
reduced operating and admin cost by 12.5%. This has led to a significant jump in PBT by 26%. Effective cost reduction efforts in this case have widened its PBT margins to 10.4% vs last year at 8.7% despite its finance cost increasing by 36.4% y-o-y.

Growing prospects.
We maintain our revenue forecast for EFB going forward for we reckon that the worse is over for the global property market and orders for MDF should subsequently pick up. But we raise our bottom line earnings estimates (FY10;+8.4%) on slightly lower admin cost and higher gross profit margin assumption - as global MDF selling prices improve. On its website, the company has recorded a slight increase in MDF selling
prices by 2% on a m-o-m basis (January ’10 vs December ’09). We expect MDF selling
price to improve in subsequent quarters.

Dividends healthy.
Just as we envisaged, EFB has declared a tax-exempt dividend of 4sen p/s (gross adjusted at 5.3sen p/s), slightly higher than our initial projection at a gross
dividend of 4.2sen p/s. In FY10, we see gross dividends to potentially increase to 5.6sen p/s premised on similar payout ratio in FY09.

FY10 should be just fine. We reckon EFB’s performance on a y-o-y basis to be better. But we see its bottom line earnings to be flat as it sees lower tax overprovision from its previous year and MI’s clawing back its profits as its loss making subsidiaries turns around. We slightly up our TP for EFB to RM1.66 from RM1.62 previously with its BUY recommendation intact. Our valuation is premised on a higher FY10 EPS at 17.1sen tagged towards a P/E of 9.7x. Potential upside risk to our earnings are i) higher than expected surge in MDF pricing leading to higher operating margins, and ii) higher than expected sales of MDFs.