Evergreen’s earnings prospects stay strong

KUCHI NG: Ever g r e en Fibreboard Bhd’s ( Evergreen) near-term earnings prospects remain intact.

The research arm of Hong Leong Investment Bank Bhd ( HLIB Research) in a report yesterday said the company is on track to reap more benefits from its cost savings exercise to improve its earnings.

The research firm noted Evergreen was in the midst of streamlining its mediumdensity fibreboard ( MDF) and particleboard production lines in Masai and Segamat, both located in Johor and investing into new machineries.

HLIB Research bel ieved the company’s streamlining of operations will result in overhead cost savings, reduced transportation cost, better production eff iciency and higher product quality.

Fol lowing a company’s briefing, it gathered that the cost savings from its production lines integration will f low through to the company’s account from financial year 2016 ( FY16) ending Dec 2016 while the particleboard production line will resume from end of FY16.

Be s i d e s t h at, H L I B Research expects Evergreen to register improved earnings from increased sales of the company’s ready-to- assemble ( RTA) furniture.

The company’s new RTA furniture line have received posit ive feedback from customers.

In the meantime, it noted the company’s new RTA furniture line has started commercial operations since May 2016.

Thus, with the posit ive response from customers, HLIB Research said Evergreen has placed deposits for an additional RTA furniture line which is expected to start operation by the second half of financial year 2017 (2H17).

Moreover, HLIB Research gathered that Evergreen has diversified its marketing efforts to the Southeast Asia region from the Middle East market to gain more revenue.

The research firm observed demand for Evergreen’s MDF products from the Middle East market, which accounted for more than 40 per cent of the group’s total revenue in FY15 has showed signs of weakness since the fourth quarter of 2015 (4Q15) and has resulted in lower average selling price to the Middle East market.

It noted the absence of pricing premium, coupled with rising transportation cost to the Middle East has caused Evergreen to shift its marketing efforts to the Southeast Asia region.

Meanwhile, HLIB Research also observed that prices of key inputs for the company for instance, rubber log wood and glue are expected to continue to trend lower and the lower costs could enhance the group’s profit margin.

It noted that glue and rubber log wood were key components in Evergreen’s production costs, accounted for approximately 60 per cent of the group’s total production costs.

The cost of inputs of those materials will continue to remain low in the near future due to weak demand outlook and excess supply capacity.