Not-So-Green

Evergreen has attracted positive coverage from analysts, who maintain "outperform" and "buy" calls with target prices ranging from RM2.80 to RM3.23. In 2007 , it reached a year-high of RM2.10 on May 23, 2007, against a low of RM1.14 on Feb 12, 2007. Now it trades at just RM1.32. What gives? Its supposed to double in 2-3 years time? Evergreen has just announced its results 4Q2007 ended 31/12/2007. For QE31/12/2007, Evergreen's net profit increased by 52.4% y-o-y from RM17.3 million to RM26.4 million on the back of a 24.0%-increase in turnover from RM137 million to RM170 million. However, when compared with the immediate preceding quarter, the net profit has dropped by 25.8% on the back of 16.1%-decline in turnover. The lower net profit was attributable to the increase in log prices as well as hike in glue prices and freight charges. No reason was given for the decline in turnover. It is possible that the drop in turnover is attributable to a fire in its Johor plant in mid-September that had partially damaged some production facilities.Evergreen's presence in diversified markets allows the company to spread its risks and avoid being exposed to a market downturn in countries like Japan or the US. Also, the company is poised to tap growth in many different countries.

For the nine-month period, Evergreen achieved a 36.4% gross margin, up 7.3 percentage points year on year, due to higher prices for medium density fibreboard. The fire, at one of Evergreen's production lines in Johor last September, affected 10% of its production. Its no secret so, the fire is an anomaly and should not affect investors' opinion.

For FY2007, Evergreen's net profit increased by 98.2% from RM59.8 million to RM118.5 million, while its turnover has increased by 38.5% from RM528 million to RM732 million. Its trading at less than 6x current year's earnings and only 4.5x next year's earnings. Something is not right. Evergreen is such an easy stock to love. Look at the margins and PER but there must be even bigger reasons why people are not buying, why institutional investors not biting? Its not for a lack of coverage also: DBS and Citigroup are among the long time promoters of the stock. What about issued shares, at 480m, its adequate enough to attract decent sized funds. The controlling shareholder holds 42.3% and LTH holds 7.0%. Free float is good. No issue there. Cost of glue and electricity could be rising as they are the main cost factors but with such sterling margins above 30%, that should not be an issue going forward. Medium density fibreboard prices has risen from an average of US$260 pcm to US$305 in 2007, and the trend is firm to flat this year. Maybe the weaker USD is creating some pressure on margins as 85% of revenue are priced in USD. Economic slowdown in US and Japan could be a negative for the company. Rising methanol, oil, freight costs and bunker fuel costs all add up. At current share price, the company is likely to pay 7.5 sen in dividend in FY08 and 9.0 sen in FY09, which translates into a very attractive dividend yield of 5.5% and 6.6% respectively. For yield players, that's excellent with strong upside for the stock price as well.

The only nagging thing is there shouldn't be such a mis-priced stock in our midst unless there is something sinister. Hence I wouldn't advocate jumping in at present levels as everything is too attractive. In horse racing when a 3 to one chance moves out to 10 to one, it usually doesn't win 99 out of 100 times. Evergreen is getting more attractive by the day, unfortunately, that does not make me feel good at all.