EVERGRN ... May10

S & P Results Review & Earnings Outlook

• For 1Q10, Evergreen reported a 54.1% YoY increase in revenue to MYR238.7 mln and a 614.6% YoY increase in net profit to MYR33.1 mln. The financial results were above our expectations and market consensus.

• The significant YoY results improvement was mainly due to the higher average selling price of its medium-density fibreboard (MDF) products (15%-20% higher YoY) and strong recovery in sales volume from a low base in 1Q09 (which was hit by a global recession). With a high operating leverage structure, the group’s higher capacity utilization rate of around 80% in 1Q10 resulted in substantial operational
efficiency and synergistic cost savings.

• Looking forward, we expect demand for the group’s MDF and particleboard products to grow in tandem with the current economic recovery, particularly in Asia. The management has indicated healthy sales orders and is optimistic of forward demand. On the cost side, the price of rubber wood - which increased 20% YoY in 1Q10 - has
stabilized in recent months, and the price of glue is also expected to remain stable in the coming months. We remain concerned about the fast-appreciating MYR, which may negatively impact the group’s profit margin (export sales are quoted in USD).

• To reflect the better-than-expected 1Q10 results and continued MDF demand, we raise our FY10 and FY11 net profit forecasts by 11.2% and 11.5% to MYR102.0 mln and MYR100.7 mln respectively.

Recommendation & Investment Risks
• We upgrade our recommendation on Evergreen to Buy from Hold with a higher 12-month target price of MYR1.80 (previously MYR1.60), after rolling over our valuation matrix and raising our forward projections. As the largest MDF producer in Southeast Asia, Evergreen has a competitive advantage in terms of operational economies of scale and cost savings. The group has proven its ability in the past few quarters
to sustain its capacity utilization rate and gain new sales orders. Evergreen is trading at an undemanding P/E ratio of 7.5x of its 2010E earnings per share.

• We continue to use P/E valuation to derive our 12-month target price. We have ascribed a P/E of 9.0x (unchanged) to the group’s revised FY11 (previously FY10) projected earnings. Our target price is inclusive of a projected dividend of 6 sen. In determining the appropriate P/E multiple, we have considered the group’s historical P/E trading range as well as its peers’ traded P/Es.

• Risks to our recommendation and target price include: (i) lower-thanexpected
demand for MDF and particleboard, (ii) fluctuation in costs of key production inputs, in particular glue and rubber wood logs, and (iii) stronger-than-expected appreciation in MYR against USD, which will dampen the group’s profit margin.