Analysis

Analysis of Evergreen Fibreboard Bhd

Dear Readers

Today, we look into Evergreen Fibreboard Bhd (“Evergreen“).

Introduction

Evergreen is, for all intents and purposes, a manufacturer of medium density fibreboard (“MDF“), so much so that MDF accounted to 80% of Evergreen’s revenue in FY2016. Other than MDF, Evergreen also produces particle boards (“PB“) (15% of FY2016’s revenue) and ready-to-assemble furniture parts (“RTA“) (5% of FY2016’s revenue).

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The main raw materials in the production of MDF are rubber wood, derived from rubber trees, and resins, an adhesive substance. MDF is produced by binding the fibres, which have been chipped off from rubber wood, with resins, and to be pressed together to form a piece of board with varying thickness.

20170702_125954-e1498974393343.jpg
Particle board used to make my study table drawer

Evergreen has about 8 operation sites located in Malaysia (Johor, Negeri Sembilan and Kedah), Thailand and Indonesia. Resins are produced in Batu Pahat, Johor, and Gurun, Kedah.

The main markets of Evergreen’s products are ASEAN countries and the Middle East. Other notable markets include the USA, Europe and Far East Asia.

Financials

DATA 2016 2015 2014 2013 2012 2011
REVENUE (RM’000) 997,795 1,012,017 941,994 938,670 1,031,662 1,061,668
PROFIT (RM’000) 71,679 90,904 170 -42,776 32,170 63,602
OPERATING PROFIT (RM’000) 100,228 118,941 16,367 -35,147 40,272 76,830
SHAREHOLDERS’ EQUITY (RM’000) 1,124,019 1,038,285 801,655 786,172 825,820 818,710
DEBT (RM’000) 408,804 377,171 439,077 478,187 505,488 476,545

 RATIO

DEBT TO EQUITY 0.36 0.36 0.54 0.61 0.61 0.58
OPERATING PROFIT MARGIN 0.10 0.12 0.017 N/A 0.039 0.07
OCF RATIO 0.86 0.44 0.26 0.11 -0.10 0.50
PROFIT MARGIN 0.07 0.09 0.00 N/A 0.03 0.06
EPS (CENTS) 8.7 17.6 0 -0.01 6.3 12.4
EPS (ADJUSTED) CENTS 8.4 10.9 0.02 N/A 3.8 7.51
DPS CENTS 2 1 0 0 4 0
P/E 11.1 13.4  

2016.7 (this is not an error)

N/A 9.3 7
ROE (%) 6.3 8.8 0.02 N/A 3.9 7.8

Between FY2011 and FY2016, Evergreen’s top line was flat; never far off from the RM1 billion mark. In the same period, operating profit margin, profit margin and EPS were a hit-and-miss. Only in FY2015 did Evergreen perform exceptionally well as prices of resin and rubber wood were low and therefore contributing to an increase in earnings.

The severe monsoon, at the tail-end of 2016, which ravaged most of Indonesia, Malaysia and Southern Thailand, had disrupted production of rubber wood and caused prices of rubber wood to soar thus reducing profits. As a result, earnings were lower in FY2016, as compared to FY2015, and the spill over from such also affected Evergreen’s earnings for Q1 FY2017 (the last quarter). The lukewarm earnings were reflected in Evergreen’s share price, which tumbled from a high of RM1.12 in October 2016 to about RM0.870.

Adverse weather affected not only Evergreen but other wood-based furniture players too. In anticipation of a reduction in rubber wood supply, caused by the last monsoon season, Evergreen, prior to the monsoon season, increased its inventory of rubber wood. However, such mitigation is limited in its effectiveness because rubber wood can generally be stored up to about 3 months after being harvested.

Even though adverse weather is a matter of concern, I reckon the main grievances faced by Evergreen is the lack of a growth impetus as its top line growth has become stagnated over the years.

Potentials

Evergreen reckons that the antidote for a stagnated growth is a major restructuring exercise, which it has executed in phases, since 2015.

On top of capital expenditure, to upgrade plants and equipment and increasing production lines, the company has also initiated cost-cutting measures, which resulted in the closing down of non-performing operation sites, such as a MDF operation site in Masai, Johor.

While the Masai operation area is being stripped down, and eventually, to be put on sale, the equipment and plants from Masai will be relocated to Evergreen’s Segamat operation site. Segamat, which houses Evergreen’s PB production, has undergone refurbishment to accommodate the receipt of equipment and plants from Masai. Furthermore, the current PB production line in Segamat has been upgraded and modernized to include the installation of Dieffenbacher pressing line from Germany. Dieffenbacher pressing line aims to:

  1. substantially increase production of PB from 120,000 cubic metres per annum to potentially 550,000 cubit metres; and
  2. allow the production of PB of less than 10mm in thickness, which Evergreen was unable to produce before.

Having MDF and PB productions integrated under one roof would mean that wastage from the production of MDF could be used in the production of PB. This leads to less wastage in totality.

PlywoodVsMDF-e1478442569522

The relocation, refurbishment and upgrading is expected to reduce processing time and increase production capacity.

Another benefit of the restructuring is to enable Evergreen to diversify away from MDF production. Evergreen intends to increase production of value-added products which entails RTA lower-end furniture. This can be seen from its investment in additional RTA production lines which will see commercial action in 2H 2017. The increase in PB production (which is the basic component of RTA lower-end furniture) will synergise with Evergreen’s plan to increase RTA furniture production.

Conclusion

I am liking the potential that will ooze from the restructuring program. I reckon higher profit margin could be obtained by increasing the production capacity of RTA furniture, which is where Evergreen is heading. With existing expertise in RTA furniture production, I expect that an increase in RTA furniture production will contribute positively to its earnings in the future due to better profit margin in RTA furniture.

As if nothing else can be more favourable to Evergreen, the Malaysia government announced that, as of 1 July 2017, all export of rubber wood from Malaysia will be banned. This aims to curb the shortage of supply of local rubber wood and its effect is expected to lower the price of rubber wood. Ultimately, Evergreen’s increased production capacity in Malaysia will benefit from such policy.

Evergreen is not without its negative. Concern is warranted especially with the economic slow down in the Middle East, the biggest contributor to Evergreen’s revenue. The low crude oil price environment (the new norm), although benefits Evergreen,  in decreasing the production cost of resins (the second largest cost component after rubber wood), will affect the sales of Evergreen’s products in that region.

There is also mixed economic data coming out of the USA which points to a economic slowdown, albeit positive outlook in Europe and Japan. Also exacerbating the whole situation is the Feds’ adamant stance of hiking interest rate at a time of economic weakness.

Disclosure

I am holding shares in Evergreen.

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Reference:

  1. FY2016 annual report
  2. Q1 FY2017 report
  3. http://www.displays2go.com/Guide/Comparing-Building-Materials-Particle-Board-MDF-Plywood-17
  4. http://www.dieffenbacher.de/en/company/public-relations/news/holzwerkstoffe/dieffenbacher-sells-two-plants-to-asia.html
  5. http://www.woodbizforum.com/malaysian-allgreen-ordered-a-new-particle-board-plant-from-dieffenbacher/
  6. http://www.thestar.com.my/business/business-news/2016/05/23/evergreen-fibreboard-aims-to-be-among-top-10-in-the-world/
  7. http://www.theedgemarkets.com/article/evergreen-fibreboard-1q-profit-falls-489-due-floods
  8. http://www.theedgemarkets.com/article/earnings-prospects-intact-evergreen-fibreboard-says-hlib-research
  9. http://www.thestar.com.my/business/business-news/2017/04/10/evergreen-fibreboard-diversifies/
  10. http://www.thestar.com.my/news/nation/2017/06/30/govt-to-ban-rubberwood-export-cabinets-decision-is-to-address-shortage-of-raw-material-says-dr-wee/
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