Monday, January 18, 2010

Why I Like Evergreen (Again)

I posted about Evergreen on 7th October last year when the share was about to break RM1.00. It has been spectacular, to say the least. Sometimes you have to reassess fundamentals and outlook as we go along. Below was the October article, I will highlight and comment (in colour) why I like it now even at RM1.60.

Boa Kwon

Description - The 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, Norbord in Canada and Pfleiderer Grajewo of Poland.

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.

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.

Boa Kwon

e) 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.

Approximately 80%-85% of EFB’s sales are to foreign customers. With the various government stimulus packages worldwide being implemented, EFB’s forward sales orders will be a direct play on global stimulus spending and global recovery.

An improvement in demand was quite evident in 2Q following a steep climb in MDF selling prices from the month of March to June. EFB’s 2.5mm MDF prices went up by 10.8% while 18mm MDF prices rose 12.8%.

Indicative average selling prices for medium-density fibreboard (MDF) have jumped 16% to US$240 (RM842.40) per cubic metre (cu m) in 3Q2009 versus US$204/cu m in 2Q2009, despite management’s initial belief that average selling prices were likely to be capped at US$220 to US$230 levels, due to pick-up of demand in 2H2009.

Following the higher demand, Evergreen’s management highlighted that the company’s capacity utilisation in July 2009 was at 68% versus 64% in 2Q2009. August and September’s utilisation would be higher or close to July’s capacity utilisation rate, based on existing contracts in hand. For 2H2009, the estimated utilisation rate should average 76% versus 60% in 1H2009.Risks include a sharp drop in MDF prices, a sharp increase in log costs, further escalation in crude oil related glue and logistics costs, and strengthening of the ringgit which could reduce the company’s export competitiveness. Well-positioned to benefit from economic recovery given that EFB is one of the biggest MDF players in the world. EFB is known to be the 5th largest MDF producer (by production capacity) in the world and they are likely to be the biggest in the region.

Key variances were the higher than-expected cost savings arising from higher capacity utilisation (3Q09 utilisation: 73%; 2Q09 utilisation: 64%); and synergistic benefits from the acquisition of Hume Fibreboard and its new third MDF line in Thailand,leading to better operating profit margin of 10.5%. The Group’s operating and administrative expenses in relation to revenue dropped to 16% in 9M09 vs. 18% in 9M08.

Year / Net Profit

2006 / 59.7m

2007 / 98.4m

2008 / 77m

2009 (e) / 44m

2010 (e) / 56m

Here is the key catalyst, for the third quarter ended Sep 2009, it recorded a splendid net profit of RM30.2m, bring the 9 months cumulative figure to RM43.1m. Just look at the average estimated net profit figure above 3 months ago by most research houses, its at RM44m. Some analysts who have visited the company over the last few weeks came away totally blown away by the operations and prospects. Now it looks very likely that its 4Q 2009 figure will exceed its 3Q figure by a substantial margin as well. A net profit figure of RM100m or more has been bandied around.

At 513m shares, that works out to be a net EPS for 2009 to be 19.5 sen, or a PER of 8.2x at RM1.60. Since the 4Q has just ended, the company will be announcing the 4Q and full year's figures very soon. As most houses are only looking at RM44m-60m max for 2009's net profit, the upward revision will be substantial.

Considering that the stock got hammered from RM2.00 down to below RM1.00 owing to the global financial crisis, its noteworthy that the company still managed to eke out a decent net profit in 2009. Things on the improve and should bring them back towards the RM1.40-RM1.50 level in the medium term.

Looking at the enhanced platform, better economies of scale going forward, a 10x PER for 2009 should be the first target, bringing it to RM2.00.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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