Evergreen Fibreboard Bhd
offer opening date :15-Feb-05
offer closing date : 25-Feb-05
issue price :1.14
Public Issue : 30,000,000
Sale Offer :113,000,000
Listing date :11-Mar-05
Board: Main
Evergreen is the only listed MDF manufacturer in Malaysia with a 16% market share.
MDF demand still strong worldwide given its suitability for furniture and interior fittings.
Evergreen rebounded from the impact of SARS and particleboard start up costs in 2003 to record over 100% growth in net profits for 2004 on the back of new operations in Thailand.
Will double capacity of MDF manufacturing in Thailand in 2005 as well as explore new product offerings for the EU market.
Ringgit repeg risk moderated by operations in Thailand and raw material imports.
Fairly valued at RM1.35 based on fair PER of 10x in line with peers in the reconstituted wood-based panel industry.
Only Listed MDF Producer
Evergreen Fibreboard (Evergreen) can be traced back to Dawa Timber Industries (M) SB which was incorporated in 1977 in Pasir Gudang. Founded by a Taiwanese businessman, Kuo Wen Chi who resettled in Singapore, the group has grown to include the manufacturing of Medium Density Fibreboard (MDF), particleboard and knocked-down wooden furniture. Evergreen is now the no. 2 MDF manufacturer in Malaysia and has expanded overseas to Thailand through the incorporation of a Thai subsidiary manufacturing MDF. The company is still largely family owned and run by the Kuo family. Given the company?s strong expansion programme in Thailand as well as the development of new products, Evergreen is seeking to raise funds through a IPO on the Main Board. This will make it the only listed MDF manufacturer in Malaysia. There will also be an offer for sale of 113m shares in part to comply with the 30% Bumiputera shareholding requirement.
About the IPO...
The IPO of Evergreen will result in it having an enlarged share base of 480.0m shares with 24.0m shares offered to the Malaysian public. Another 63.7m shares were offered to selected investors and 6.0m shares were offered to directors as well as employees of Evergreen.
What is Medium Density Fibreboard?
A Replacement for Solid timber and plywood
As the sale of products related to MDF constituted some 97.4% of PBT for 10mthsFY04 (excluding loss making divisions and consolidation), Evergreen is still very much a MDF manufacturer despite its forays into furniture and particleboard manufacturing. MDF is part of a family of timber products known as Reconstituted Wood-Based Panel Board Industry. This group of products consist of the following:
- MDF and High Density Fibreboard which are made from wood fibres, mixed with glue and compressed using pressure and temperature
- Particle Board also known as chipboard which are made from wood chips, mixed with glue and compressed together
- Wood strands which are manufactured from wood strands and cement
- Oriented Strand Board (OSB) which are made from wood strands or flakes and binded under heat and pressure
As such, the main difference between these products are the raw materials from which they are made which ranges from wood flakes for OSB to chips for Particle Board and wood fibres for MDF.
Comparing MDF to particleboard and plywood, we find that MDF generally has characteristics between the two other timber products as detailed below:
Malaysia, No. 3 Exporter of MDF
The reconstituted wood-based panel industry has been promoted in Malaysia through various incentives such as reinvestment allowances and pioneer statuses. Given that the industry in Malaysia utilises smaller rubber logs and branches (offcuts), the consumption of such by-products from the furniture making industry is viewed favourably. Malaysia is currently the no. 3 exporter of MDF in the world and based on the production in 2003, Evergreen was the no. 2 MDF manufacturer in Malaysia with approximately 16% market share. Given the demand for timber products worldwide and the discount for MDF as compared to plywood, the market for MDF continues to appear healthy. Evergreen in particular is focused on exports to the China market where MDF is largely used in the furniture industry. With a growing middle class as well as forecasted GDP growth of 8%, China?s furniture and wood based industry looks set to continue expanding strongly.
Evergreen - No. 2 in Malaysia with Presence in Thailand
3 core products, 2 countries
Aside from its MDF, Evergreen started producing particleboard in 2003 in consideration of the growing demand for particleboard based furniture. It also produces knock-down wooden furniture from its facility in Batu Pahat.
Over 100% growth in net profits for 2004
Looking at Evergreen's financial performance, the company recorded steady topline growth between 1999 to 2003. However, its profit track record was patchy with a dip in 2003 profits due to:
- Start up costs relating to its particleboard line.
- The impact of SARS which caused furniture sales to dip in China. Overseas buyers also avoided China due to the SARS outbreak and furniture exports dropped sharply
However, in 2004, both revenue and profits recorded a sharp rise due to:
- Recovery from SARS
- Turnaround of the particleboard operations
- The start of MDF manufacturing in Thailand which has a capacity equivalent to 58% of the Malaysian MDF capacity. Thailand operations are also tax exempt until 2006.
These 3 factors resulted in net profits jumping by 107.3% for FY04.
Doubling capacity in Thailand
Although Evergreen has announced it is investing in a chipping facility to help supplement its supply of raw materials and purchase additional melamine lamination equipment, the main capacity expansion programme it has is in Thailand. It is doubling its MDF capacity in Thailand from 162,000 cu m to 324,000 cu m. This new line will be ready in 2Q05 and will be the main driver for growth in 2005.
New Products
Evergreen is also looking to produce high moisture resistant MDF for use in areas which are exposed to higher levels of moisture such as external doors, bathrooms, kitchen and window frames. More exciting is its planned commercial production of E1 class MDF by end 2005 where the emission of formaldehyde is low. MDF of this class is sought after in the European Union where given the more environmentally friendly nature of MDF which utilises wood waste, Evergreen should find a ready market.
The Risks Remain
Ringgit Repeg
Pressure has eased somewhat on China to unpeg the yuan and this has led to reduced calls for Malaysia to unpeg the Ringgit. Nonetheless, this remains the no. 1 risk for Evergreen. With 82.2% of its revenue being derived overseas for the 10mthsFY04, any repeg could have an adverse impact as prices of MDF internationally are quoted in USD. There is some consolation given that raw materials costing the equivalent of 21% of its revenue over the same period was imported, thus providing a slight hedge. These imported raw materials were mainly comprised of glue and temperate log veneers. Not forgetting its Thai operations that would not be impacted by a Ringgit repeg. Nonetheless, the overall impact of a Ringgit repeg will still be negative to Evergreen.
Running out of Rubber
The total acreage of rubber plantation decreased at an average annual rate of 2.7%. This gives rise to concern that the rubber wood used by Evergreen is a dwindling raw material. Nonetheless, other industry players have mentioned that there should be sufficient rubber wood in Malaysia to last another 8 to 10 years. Another mitigating factor is its operations in Thailand. As of 2003, Thailand?s exports of natural rubber totalled USD2.8bn versus USD942m from Malaysia. With an aggressive replanting programme, rubber wood is cheaper and more readily available in Thailand as compared to Malaysia.
Forecast and Valuation
Profit Forecast Achievable
Given Evergreen?s achievement of its FY04 profit estimate of RM45m, after analysing its revenue and cost structure, we are of the opinion that the company?s net profit forecast of RM65m for FY05 as stated in the prospectus is achievable. Tagging a simple timber sector PER of 13.5x to its FY05 EPS of 13.5 sen would translate into a fair value of RMRM1.83. Nonetheless, a quick look at the other reconstituted wood-based panel manufacturers already listed indicates that the recent weakness in the share prices of timber players has also dampened the PER of these mid-downstream players.
Fair Value tagged at RM1.35
As such, we apply a fair PER of 10x to account for its IPO status and lower average PER of its reconstituted wood-based panel peers as compared to other timber players. This translates into a fair value of RM1.35. Given its status as the sole listed MDF manufacturer in Malaysia and with its Thailand operations, Evergreen may be attractive to long term investors looking for timber players with less exposure to Ringgit repeg risk.
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