Fibreboard makers rally

Written by Yong Yen Nie

Friday, 18 March 2011 14:10

KUALA LUMPUR: Fibreboard makers rallied yesterday, mainly due to a spillover of interest in timber stocks, following the earthquake in Japan last week. 

Another catalyst was the recent proposal by a South Korean fibreboard manufacturer to acquire the particleboard manufacturing assets of Heveaboard Bhd for RM245 million.

Yesterday, Evergreen Fibreboard Bhd rose seven sen to close at RM1.43, while Mieco Chipboard Bhd surged 15.5 sen to 68 sen.

The surge in fibreboard makers’ share prices reflects heavier interest in the timber sector that spilled over to subsectors such as furniture makers and chipboard manufacturers, said analysts.

Since Evergreen and Mieco are downstream players in the timber sector, they have become the targets of investors currently looking for value, one analyst said.

The analyst said timber stocks rallied almost immediately after the earthquake hit Japan last week, as investors expect demand for wood to reconstruct homes to be significantly higher.

“Typically, there is a market perception that the other subsectors will be the next in line, as demand for electrical appliances and furniture in Japan is also expected to rise,” he says.

This is despite Evergreen’s low exposure to Japan. According to a report by OSK Research yesterday, Evergreen’s sales to Japan make up less than 0.5% of its total revenue while indirect sales constitute less than 5%.

“Thus, we do not see any major earnings impact on Evergreen in the near term stemming from orders due to the recent on earthquake and tsunami in Japan.

“However, as medium-density fibreboard comes in a variety of forms, such as furniture, ceiling and partition walls, the need for housing repairs and furniture replacement may spur orders for MDF in the mid-to long-term (six months and beyond),” said. 


An industry observer said another catalyst for interest in chipboard makers were their low valuations.

Based on their latest share prices and net assets per share as at Dec 31, 2010, shares in Mieco Chipboard were trading at 0.44 times its book value of RM1.52.

Meanwhile, Evergreen was also trading just below its book value of RM1.50.

Prior to the quake, chipboard makers were weighed down by concerns over rising operating costs due to higher rubberwood and coal prices.

Indeed, The Edge Financial Daily had on Monday highlighted the prospects of potential mergers and acquisitions activity in the furniture related sector. The three major catalysts highlighted were the Heveaboard acquisition, the sector’s low price-to-book ratios and the tough operating environment.

Last Tuesday, Heveaboard received an offer from Dongwha Malaysia Holdings Sdn Bhd, part of Dongwha Holdings Co Ltd, a South Korea-based medium-density fibreboard manufacturer, to acquire its assets related to the manufacturing of particleboard. If the deal is approved, it will be transacted at no less than RM245 million, based on the book value of Heveaboard’s assets as at Dec 31 last year.

This will be a major cross-border deal for Heveaboard, which manufactures ready-to-assemble furniture and particleboard from rubberwood. This follows earlier rumours that a Chinese party was eyeing Mieco, although interest in Mieco by the Chinese party was believed to have fallen through.

OSK Research is maintaining a “buy” call on Evergreen, but cut its target price to RM1.73 from RM2.02 previously, on the grounds that its earnings will be hit by higher raw material prices.

The price of Evergreen’s main raw material, rubber wood, which constitutes between 25% and 30% of operating costs, had soared last year. 
 
The price increase is attributed to supply shortage stemming from unfavourable weather conditions in Malaysia and Thailand late last year and high latex prices, leading to farmers’ reluctance to cut down rubber trees for wood, said the research house.

“Although management clarified that it intended to raise selling prices in order to mitigate the rising costs, the company still faced a cloudy near-term outlook since the possibility is high that raw material prices will escalate.

“Due to the shortage of raw materials, we also expect Evergreen’s plant utilisation rate to come in lower as well,” OSK Research said.

The analyst said, while concerns of higher operating costs were still present, they may drop slightly, as demand for latex might fall, following the temporary closure of car manufacturing plants in Japan.

Most of the Japanese automakers including Toyota Motor Corp and Honda Motor Co remained shut yesterday, with the closures expected to extend until the end of this week.



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Note: It is nice to know Evergreen Fibreboard Bhd has attracted the analysts' attention. I do own shares in this company. It is not a recommendation to buy or sell this share. Please make up your own investing decision.


Let's hope this share will have a nice rally..