Possibly The Best Stock To Hold For The Next 2 Years

That was a daring headline, but I have my reasons. Many of you would have "discovered" this stock already on your own or in the news. To me, it is on the brink of greatness, the catalysts are all there and looking at their financials, its quite undervalued relative to the growth prospects and corporate strategic management.

In the latest issue of Forbes, it featured the 200 Best Companies in the world with Sales of under a Billion USD. Malaysia should be proud that it had 9 companies on the list: CBIP, Cheetah Holdings, Coastal Contracts, Evergreen Fibreboard, Hai-O, JobStreet, Mah Sing, Padini and YNH Property. The companies were screened for "consistent growth & profitability" over 3 years. To me, that is an OK list and companies which made the list need not gloat too much as I see more reasons why I would discard the same companies from a better list. I would totally take out CBIP, Cheetah, Padini and Hai-O, to me they do not deserve any accolades in terms of "quality of earnings" and "superior strategic management and positioning". The stock I hinted in the headline is one of the remainders which made the Forbes list.

Description - The second largest manufacturer of medium density fibreboards in the country. MDF accounts for nearly 80% of company's revenue. Other products include value-added MDF products, furniture, particleboard and fancy plywood. Three production centers: 10% produced in Indonesia, 54% in Thailand and 36% in Malaysia.

Competition - Vanachai in Thailand with a market cap of US$170m, Norbord in Canada with a market cap of US$1.1bn and Pfleiderer Grajewo of Poland with a market cap of US$750m. Evergreen Fibreboard stands at US$265m in market cap.

Why Evergreen Fibreboard???

a) Great product. Its not only great in terms of growth but it is more importantly a superior product, and much of the growth is in replacing older wood based products in various forms.

b) Great financial business model within the company. Management has a superior understanding and appreciation of the minutest cost item. They are more than able to discuss and plan with risks associated with: weak MDF prices; hikes in prices of glue and resin which make up nearly 30% of production cost; and pockets of global growth and distribution strategy.

c) Superior strategic management & planning. Just go to their website, it is easily the BEST corporate website that I have even come across anywhere globally. This is not a fly by night company. Its execution ability is peerless. It has good in-depth understanding of the markets they are in. A keen understanding of their competitors and how to position their own company. It thinks two three steps ahead in terms of cost management and production facility growth strategy. Superb.

http://www.evergreengroup.com.my/

d) Transparency, Integrity & Focus - Just go to their website, its a wonderful library. It even detail the selling prices of their various products in the global arena. The entire information overload is a reflection on other more important EQ qualities. There is also no fear in revealing insider information as they know the real strength and competitive advantage is in its people, strategic talent, financial discipline, and superior understanding of the products' evolutionary cycle and competition.

e) Margins & Growth - Gross margins in 2007 should be around 35%, and due to their better business model, they can compete globally and win market share without dropping net margins too much. The USD is an issue and the differing production locations is a great farsighted move.

f) They are on the brink of greatness. Their eps y-on-y growth is estd. at 60% in 2007, another 25% in 2008 and another 20% in 2009. That puts the company firmly within the range of the other two companies in Poland and Canada. By mid-end 2008, Evergreen should be able to make a full bid for either companies - thats because organic growth can only take you so far. I think Evergreen's market cap will need to reach US$400m-600m in order to be able to bid for either companies. The M&A move is about 18-24 months away as I cannot see how Norbord can stay competitive once globalisation of Evergreen's operations and reach take place. Survive or be consumed.

g) Companies that are going to give you 200% or 300% returns over a couple of years are the ones among the top tier globally, and have a superior business model and strategy that puts them at #1 or #2 within a few years. Evergreen Fibreboard fits all my requisite factors. The company has been ramping up capacity via acquisitions and joint ventures - and they have shown a great track record in integration of these companies into a cohesive manufacturing concern.

h) Currently, their main export markets are China, Vietnam and the US, although they do export to more than 40 countries globally. Which is why organic growth can only take you so far, and they will need to make a big acquisition soon. They have the ability and their growth is there which will make them a big player within the next 2 years. Their current net gearing is a ridiculous 0.1x which points at how financially prudent the company is, and how the capacity to leverage for bigger acquisitions to fund future growth.

i) Its the right sector. The soft commodities sector is strong for reasons which I have blogged about before. Prices for MDF rose by more than 20% in 2007 alone. Future hikes is likely judging from the supply and demand, owing to the fact that MDF is a superior product and continuously replaces a lot of older similar products.

Year / Net Profit

2006 / 59.7m

2007 (e) / 120m

2008 (e) / 155m

2009 (e) / 185m

Current price is around RM2.04. I see the stock reaching RM3.50-4.00 sometime next year without much problem. Evergreen Fibreboard has the roadmap for greater success. Hard to see them failing to get there.