PP 7767/09/2010(025354)

Malaysia
RHB Research
2 June 2010
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
2 June 2010
MARKET DATELINE

Evergreen Fibreboard Share Price

Fair Value
:
:
RM1.43
RM2.30
Higher Dividend Payout, Outlook Remains Favourable Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (EVERGRN; Code: 5101) Bloomberg: EVF MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing NDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009a 771.5 85.0 16.6 11.6 9.0 - 1.1 7.0 12.1 0.4 2.7
2010f 915.0 107.9 21.0 27.0 7.1 19.0 1.0 12.9 13.9 0.4 5.6
2011f 1001.4 118.0 23.0 9.4 6.5 21.0 0.9 6.1 13.9 0.2 6.9
2012f 1065.1 127.9 24.9 8.4 6.0 26.0 0.8 5.7 13.5 0.1 4.2
Main Board Listing /Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Qoq, results to be stronger. Evergreen expects 2Q10 results to be Issued Capital (m shares) 513.0
stronger by c.5% qoq, due mainly to higher sales volume coupled with Market Cap(RMm) 733.6
higher average selling prices. Current capacity utilisation rate is above the Daily Trading Vol (m shs) 0.7
80% level while average selling prices have since strengthened by 3% in 52wk Price Range (RM) 0.65-1.80
2Q10 vs. 1Q10. Total cost of production has dropped by 2.5% in 2Q10. Major Shareholders: (%)
Kuo Family 45.5
♦ Indonesia operations commissioning in 2H10. Evergreen will be
Lembaga Tabung Haji 9.4
commissioning its currently dormant Indonesian plant in 2H10. To be
HIMB Trading Ltd 6.4
conservative, we have only assumed contributions from Indonesian
operations to start from FY11 onwards. If the plant is commissioned on time FYE Dec FY10 FY11 FY12
in 2H10, this would potentially raise our FY10 forecast by 5%. EPS chg (%) -1.4 -1.4 -3.2
Var to C.EPS 10.7 9.5 -4.1
♦ Growth moving forward. Evergreen expects growth to mainly come from (%)
an improvement of market share in the region as well as reduction in cost of
production. Moving forward, Evergreen plans to grow both its Thailand and PE Band Chart
Indonesia market shares to 5% (from <2%) and 10% (from 6%),
respectively in the near term. We also believe that Evergreen may try to PER = 14x
PER = 11x
further reduce its cost of production through the securing of rubberwood log PER = 8x
supply by acquiring rubber plantation land and/or the acquisition or
commissioning of a third glue plant. Any acquisitions of existing MDF players
would only take place earliest in 2012, if opportunities present themselves.
♦ Dividend payment year. Given its stronger financial position currently,
Evergreen highlighted that it may pay out more interim dividends in FY10
and FY11. Evergreen also targets to be in a net cash position by end-2011
Relative Performance To FBM KLCI
(from 0.4x net gearing currently). Following management’s commitment to
paying out higher dividends in FY10-11, we have increased our net dividend
payout assumption to 40-45% in FY10-11 (from 25%) which would bring
dividend payouts back to ‘06 levels of 40% (before the acquisition of
Takeuchi MDF and Hume Fibreboard). This translates to a very respectable
6-7% net dividend yield for FY10-11 (from 3-4% previously). Evergreen Fibreboard

♦ Risks. The risks include: 1) sharp drop in MDF price; 2) sharp increase in log
costs; 3) further escalation of crude oil related glue and logistics costs; and
4) strengthening of the ringgit which could reduce the company’s export FBM KLCI

competitiveness.
♦ Forecasts. We reduced our earnings forecasts by 1.4-3.2% for FY10-12 p.a.
after updating our US$/MYR assumptions; our FY09 numbers; and increasing
our dividend payout assumptions.
♦ Investment case. Post earnings revision, we value Evergreen at RM2.30
(from RM2.35) based on unchanged target PER of 11x FY12/10 earnings Hoe Lee Leng
(which is at a 3x PE discount to the timber sector due to its smaller market (603) 92802239
capitalisation). Maintain our Outperform recommendation on the stock. hoe.lee.leng@rhb.com.my

Please read important disclosures at the end of this report.

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 2 June 2010

♦ Qoq, results to be stronger. In 1Q10, Evergreen achieved a capacity utilisation rate of 80% (or 86% ex-
Indonesia), up from 4Q09’s 78% and higher average selling prices of +2-3% qoq. On the cost front, raw
material prices have increased by 10% qoq (equivalent to around +5% of total production cost) which we
believe was mainly due to higher rubberwood log costs. In 1Q10, lower harvesting during the period following
high latex prices (+32% qoq), led to rubber planters delaying their replanting activities, hence, the higher
rubberwood log prices. Baring any unforeseen circumstances, management expects 2Q10 results to be stronger
by around 5% qoq, due mainly to higher sales volume coupled with higher average selling prices. Current
capacity utilisation rate is marginally above the 80% level while average selling prices have since strengthened
by 3% in 2Q10 vs. 1Q10. Meanwhile, glue and rubberwood log prices have dropped by 4-5% quarter-to-date,
which would give a total savings of 2.5% to total production cost in 2Q10. The capacity utilisation rate achieved
YTD is currently in line with our forecasts of 80% in FY10, while YTD increase in average selling prices of about
8% is also currently in line with our forecast of a 9% yoy increase in FY10. In FY10, we have forecasted per unit
MDF cost assumption to rise by 2-3% yoy, which is also currently in line with management’s numbers.

♦ Exposure to US$ a concern? Currently, about 70-75% of Evergreen’s sales are transacted in US$ (export
market). Following the weakening of US$, Evergreen has converted some of its short-term loans (which
comprise 23% of total debt and equivalent to about 10-11% of external revenue) to US$, to act as a natural
hedge for its US$ transactions. Evergreen also expects to benefit from the low interest rate environment in the
US (vs. Malaysia), which in turn, could result in lower interest expense for the group. We also understand that
Evergreen is currently looking at other hedging methods for its remaining US$ exposure but this has not been
finalised yet. We have yet to input any potential impact from the hedging position taken and the lower interest
expense. In any case, we note that the weakening of US$ against RM would only affect the company for a 1-2
month period, at most, as this is the maximum length of the contracts that it has with its customers, after which
it would be able to pass down the currency impact via price increases to customers.

♦ Indonesia operations commissioning in 2H10. Evergreen will be commissioning its currently dormant
Indonesian plant in 2H10, as both its plants in Malaysia and Thailand are now running at c.86% utilisation. We
estimate that its Indonesia operations could potentially record RM5m in net profit for FY10 (from losses of
RM2.4m in FY09). However, to be conservative, we have only assumed contributions from its Indonesian
operations to start from FY11 onwards, with assumptions of capacity utilisation at 55% and 60% for FY12. If the
plant is commissioned on time in 2H10, we estimate this would potentially raise our FY10 forecast by 5%.

♦ Taking advantage of its regional operations. Evergreen operates from different countries i.e. Malaysia,
Thailand and Indonesia, which will enable it to gain further market share in these respective markets as well as
to benefit from any trade or tax incentives available in each of these markets. For example, Evergreen
highlighted the Government of India has imposed antidumping duty of >20% on all imports of plain MDF boards
with thickness of 6.0mm and up from Malaysia, Thailand, New Zealand, Sri Lanka and China since Jul 09. As
Indonesia is exempted from this antidumping duty, Evergreen would still be able to export to India from its
Indonesian plant without incurring such duties. Currently, India accounts only for 2% of Evergreen’s total sales.

♦ Growth moving forward. Evergreen has highlighted that it expects growth to mainly come from an
improvement of market share in the region as well as reduction in cost of production. Evergreen’s market share
in Malaysia, Thailand and Indonesia is currently at 70%, <2% and 6% respectively. Moving forward, Evergreen
plans to grow both its Thailand and Indonesia market shares to 5% and 10%, respectively in the near term. We
also believe that Evergreen may try to further reduce its cost of production through the securing of rubberwood
log supply by acquiring rubber plantation land and/or the acquisition or commissioning of a third glue plant.
Evergreen also plans to strengthen its position in the region by acquiring existing MDF producers both in
Malaysia and overseas, which we believe would only take place earliest in 2012, if opportunities present
themselves.

♦ European players a threat? While the Euro has weakened considerably vs. RM (by 15-18% yoy), we
understand that European players are still not a threat to Evergreen as they are still very much less competitive
than Evergreen given the log cost in Europe has jumped considerably yoy. European players mostly purchase
their logs from Eastern Europe, which have hiked up log prices by 5-15% yoy YTD to adjust for the weakening
Euro.

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 2 June 2010

♦ Dividend payment year. Evergreen’s priority for the next two years would be to: 1) consolidate its operations
following the commencement of its Indonesia plant; 2) to par down its debt by about RM100m p.a.; and 3) to
pay out 20-50% of its net earnings in dividends. In 1Q10, Evergreen declared a 2 sen tax-exempt dividend.
Given its stronger financial position currently, Evergreen highlighted that it may pay out more interim dividends
in FY10 and FY11. Evergreen targets to be in a net cash position by end-2011 (from 0.4x net gearing currently)
based on an estimated operating cash flow of RM200m p.a.. In our forecasts, however, we have projected
Evergreen to remain in a net gearing position of 0.2x in FY11 based on a more conservative operating cash flow
projection of RM120-160m p.a. for FY10-11. Evergreen is expected to incur RM60m capex in FY10 and RM20m
recurring capex for FY11-12, which is in line with our expectations. Following management’s commitment to
paying out higher dividends in FY10-11, we have increased our net dividend payout assumption to 40-45% in
FY10-11 (from 25%) which would bring dividend payouts back to ‘06 levels of 40% (before the acquisition of
Takeuchi MDF and Hume Fibreboard). However, we maintain our net dividend payout assumption of 25% in
FY12. The higher net dividend payout would translate to a very respectable 6-7% net dividend yield for FY10-11
(from 3-4% previously).

Risks

♦ Risks include: 1) sharp drop in MDF price; 2) sharp increase in log costs; 3) further escalation of crude oil
related glue and logistics costs; and 4) strengthening of the ringgit which could reduce the company’s export
competitiveness.

Forecasts

♦ Tweaked earnings forecasts. We reduced our earnings forecasts by 1.4-3.2% for FY10-12 p.a. after updating
our US$/MYR assumptions to RM3.25/US$ in CY10 (from RM3.30/US$), RM3.20/US$ in CY11 (from
RM3.25/US$) and RM3.15/US$ in CY12 (from RM3.30/US$); our FY09 numbers; and increasing our dividend
payout assumptions.

Valuations And Recommendation

♦ Maintain Outperform. We continue to like Evergreen as we believe that it is poised to benefit from the
improving MDF industry outlook, underpinned by increasing demand and average selling prices, given its market
leading position in the South East Asian MDF industry, coupled with its lean cost structure. Furthermore, we
believe that Evergreen will be paying out generous dividends in FY10-11 with about 6-7% net yield, given its
stronger financial position and minimal capex requirements during both years. There could also be potential
earnings upside for FY10 coming from its Indonesia operations, if the plant commences operations on time. Post
earnings revision, we value Evergreen at RM2.30 (from RM2.35) based on unchanged target PER of 11x FY12/10
earnings (which is at a 3x PE discount to the timber sector due to its smaller market capitalisation). Maintain our
Outperform recommendation on the stock.

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 2 June 2010

Table 2. Earnings Forecasts Table 3. Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 771.5 915.0 1001.4 1065.1 Capacity utilisation (%) 80 85 90

Turnover growth (%) 5.6 18.6 9.4 6.4 Average MDF selling price (US$/m3) 249 264 285
Average particleboard price 116 121 131
(US$/m3)
Cost of Sales (562.1) (652.9) (711.1) (763.0) RM vs US$ 3.25 3.20 3.15
Gross Profit 209.4 262.1 290.3 302.2

EBITDA 134.4 164.3 178.2 184.5

EBITDA margin (%) 17.4 18.0 17.8 17.3

Depr&Amor (37.8) (34.8) (33.1) (31.4)

Net Interest (17.8) (15.8) (13.8) (12.0)
Associates 1.9 1.2 1.2 1.2

Pretax Profit 80.8 114.8 132.4 142.2

Tax 0.2 (9.0) (12.4) (13.4)
Minorities 4.0 2.0 (2.0) (1.0)
Net Profit 85.0 107.9 118.0 127.9
Source: Company data, RHBRI estimates

Chart 1: Evergrn Technical View Point

♦ The upward momentum on Evergrn accelerated in
Oct 2009, sending the share price to above an
important resistance level of RM1.34.

♦ Thereafter, the stock was sustained at above

RM1.34 for most of the time.

♦ It hit a multi-year high of RM1.80 in Apr 2010, but

gave in to selling pressure almost immediately.

♦ As it retreated in recent weeks, it tested the

supportive UTL and the key resistance-turn-support
level of RM1.34, before ending yesterday at
RM1.43.

♦ Technically, although it is still sustained at above

RM1.34 and the UTL, the short-term chart does not
appear convincing for a further rebound in the near
term.

♦ In fact, given the weakening outlook on the

momentum indicators, it might threaten those
supports again soon, in our view.

♦ Chart wise, the next support is sighted at RM1.10.

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IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a
period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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