KUALA LUMPUR (Nov 28): Hong Leong Investment Bank (HLIB) has maintained its “hold” call on Evergreen Fibreboard Bhd, with a target price of 36 sen, and said demand from the Middle East and Indonesia remains steady, with no disruptions to demand in the Middle East from the Israel-Hamas war.

HLIB said Evergreen’s core net profit of RM4.2 million for the third quarter ended Sept 30, 2023 (3QFY2023), which was 46.5% higher quarter-on-quarter but down 72% year-on-year, brought the cumulative nine-month sum to a negative RM13.5 million (RM47.9 million a year earlier), which was within the research house's expectations.

In a note on Tuesday, the research house attributed the weak performance to the elevated interest rates, which affected the housing affordability of people, and contributed to soft furniture demand in North America (NA) and the European Union (EU).

“Demand for furniture in the NA and EU regions remains weak, as interest rates remain elevated, resulting in lower housing affordability and thus softer furniture demand, negatively impacting the group’s RTA (ready-to-assemble) segment directly and the panel board segment indirectly.

“Despite the US Federal Reserve having paused its interest rate hikes, they have also indicated that rates might remain higher for longer in order to bring inflation down to the 2% target. Because of this, Evergreen’s Malaysian segment could continue to remain weak in the near term,” the research house said.

Nevertheless, on a quarter-on-quarter basis, Evergreen experienced a 2.1% growth in revenue driven by improvements in Malaysia and Indonesia, although this was partly offset by a decline in Thailand.

Notably, the company saw a substantial surge of 46.5% in core net profit for 3QFY2023, primarily fuelled by higher operating income from insurance income and a stronger performance of the US dollar.

This enabled the group to achieve a better profit before tax margin of 3.6%, up from 2.0% in 2QFY2023.

Year-on-year, Evergreen’s revenue decreased by 5.3%, due to declines in Malaysia and Indonesia, partially offset by an increase in Thailand.

HLIB stated that the company's core net profit decreased by a larger magnitude of 72% due to elevated operational costs, as a result of a hike in the electricity surcharge and higher minimum wage in Malaysia.

Year to date, revenue fell by 28.5% due to lower sales volumes and average selling prices caused by continued weak furniture demand from NA and the EU.

“Nonetheless, we believe Evergreen’s initiatives to optimise its operations and to take advantage of its strengths by relocating its MDF (medium-density fibreboard) plant will bring long-term benefits, placing the group ahead of its competitors.

“Moreover, US dollar strength against the ringgit should benefit the group, as more than 70% of the group’s revenue is denominated in US dollars, while most of its costs are in local currencies,” the research house added.

At the time of writing on Tuesday, Evergreen was traded at 32 sen per share, translating into a market capitalisation of RM266.62 million.