Monday 26 November 2012

Evergreen Fibreboard - Recovery Not in Sight


Evergreen’s  9MFY12  results  were  below  ours  and  consensus  estimates, accounting  for  only  56.5%  and  57.7%  of  both  forecasts  respectively.  The  weaker than expected earnings were mainly due to: i) a drastic hike in cost of glue, ii) the weaker  USD,  and  iii)  high  latex  prices  due  to  the  prolonged  rainy  season.  As  the near  term  prospects  remain  negative,  we  are  downgrading  our  FY12  and  FY13 earnings  forecasts  by  24.0%  and  26.8%  respectively.  In  line  with  our  earnings downgrade and pegging  the  stock  to  a lower target  6x multiple  vs  7x  previously, we  downgrade  our  call  from  BUY  to  NEUTRAL,  with  a  revised  FV  of  RM0.66 (previously RM1.02).  

Earnings  continue  to  disappoint.  Evergreen’s 9MFY12 results came in below ours and consensus expectations, accounting for only 56.5% of our and 57.7% of consensus’ expectations.  The  weaker  than  expected  earnings,  which  were  7.2%  lower  y-o-y,  were largely due to: i) a drastic hike in the cost of glue, ii) a weakening USD, and iii) high latex prices due to the prolonged rainy season, which offset the 4.1% revenue growth y-o-y.

Downgrading our FY12 and FY13 earnings. We believe that the company’s near term prospects remain negative for the time being, due to: i) higher raw material costs, and ii) competition in the industry, which is hindering sales growth. Hence, we are downgrading our FY12 and FY13 earnings forecast by 24.0% and 26.8% respectively. That said, next year’s  earnings  could  improve  if  the  company  successfully  sets  up  its  sales  and marketing team and is able to sell the excess glue it produces internally.
 
Downgrade  to  NEUTRAL.  In  line  with  our  earnings  downgrade  and pegging  the  stock to a lower target multiple of 6x compared to 7x previously, we are lowering our fair value to RM0.66 from RM1.02 previously. Hence, we are downgrading the stock from BUY to NEUTRAL on the back of the company’s dimmer prospects in the near term. The stock’s key  re-rating  catalysts  next  year  included:  i)  successful  marketing  of  the company’s excess  glue,  and  ii)  better-than-expected  sales  for  logs  in  relation  to  its  recent  land acquisition.
Source: OSK

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