EVERGRN ... Sep10

OSK Research

On an annualised basis, Evergreen Fibreboard’s (EFB) earnings beat our and consensus estimates. However, in being conservative, we are retaining our earnings estimates and maintain the stock’s target price at RM2.63, with its BUY recommendation intact. We also note that EFB has declared a second interim taxexempt dividend of 2 sen per share, which brings its total payout YTD to 4 sen per share, accounting for 55.5% of our full-year estimate of 7.2 sen per share.

Stellar performance. Thanks to higher average selling prices for medium-density fibreboards (MDF) and increasing orders from its global customers, EFB charted growth at all levels. 1H revenue hit a high of RM480m (+43.1% y-o-y) while PBT came in at RM78m  (+427% y-o-y). Due to cost efficiencies and lower raw material prices achieved in 2Q10, EFB’s q-o-q PBT rose 11% although revenue was flat. Please see our 1HFY10 results preview report on EFB dated 6 Aug 2010 for more details with regard to its quarterly selling prices and raw material cost trend.

Holding estimates. Consensus had recently raised their earnings estimates in view of strong earnings achieved by EFB. Although the annualised earnings were above our estimates, we are however not revising our forecasts. For one, in our 1HFY10 results preview, we had noted that declining rubber wood prices had helped lift EFB’s 2QFY10 earnings. However, we reckon this trend will not last long as the strong regional demand for MDF and particleboards will remain, thus prompting prices to catch up. Other than that, statistics from the Malaysian Meteorological Department indicates that there has been higher than average rainfall in June in certain parts in the south of West Malaysia. Since EFB sources its rubber wood from this area, it likely that rubber wood prices will go up in 3QFY10 as higher rainfall will dampen supply. Orders may slow too as demand for MDF cools off slightly as customers seek substitutes such as particle boards, which are usually priced 60-80% cheaper than MDFs.

Maintain BUY. We are keeping our BUY recommendation for EFB as its fundamentals remain intact. Our target price is maintained at RM2.63, derived from pegging its FY11 EPS at 26.3 sen and ascribing to the stock a higher tier building material PE of 10x.