KUCHING: Sarawak’s tropical log exports have fallen following the current dry spell, which have caused the water levels in rivers to drop, making it difficult to transport logs out of the forest concession.
SMOOTH SAILING: The drop in log volumes to be offset by a recovery in selling prices of between five per cent and 10 per cent from the low last year due to the tighter supply.
RHB Research Institute Sdn Bhd (RHB Research) believed the two timber concessionaires who would be most affected by this were Jaya Tiasa Holdings Bhd (Jaya Tiasa) and WTK Holdings Bhd (WTK).
Nevertheless, it expected this impact to be temporary as seasonally, the dry period should end by March or April this year and log volumes should then start to recover from the second quarter of this year.
Furthermore, the research house expected that the drop in log volumes to be offset by a recovery in selling prices of between five per cent and 10 per cent from the low last year due to the tighter supply.
Currently, it forecasted log volumes to rise by between five per cent and 10 per cent in calendar year (CY) 2010 and log prices to increase by 10 per cent year-on-year (y-o-y) in CY 2010.
On the other hand, news report recently highlighted that the Sarawak state government (SSG) had rejected Sarawak Timber Association’s (STA) request for 50 per cent discount on royalty for timber extracted from agro-conversion areas as well as for timber with a diameter size of 30cm to 40 cm.
However, the SSG had accepted the appeal of STA to defer the increase in timber royalty rates by six months until June 10. The research firm stated what this implied that timber companies would continue to pay the old royalty of RM50 per cubic metre (m3) instead of RM55 per m3 as fixed by authorities.
Notably, under a revision of the royalty rates two years ago, the Sarawak Forestry Department (SFD) had proposed a flat rate of RM65 per m3 for all timber with a diameter of 30 cm and above.
However, STA argued that the proposed flat rate was “inequitable” and subsequently it was changed to RM50 per m3 last year then revised to RM55 per m3 this year and RM60 per m3 next year.
On planted forest, the research house stated that STA was waiting for the SFD’s reply to its request for exemption from the payment of assess for five years starting from the first harvest of plantation.
RHB Research believed that the deferment of the increase in timber royalty rates by until June 10 implied that fundamentals for the timber sector had yet to fully recover and that timber players still needed some help from the SSG to buffer their earnings.
In addition, the research firm noted that overall it was neutral to slightly positive on this development as it showed some support from the SSG to help timber players during times of crisis but in the near term, any royalty rate increase would still impacted timber players under its coverage.
RHB Research maintained its forecast for the royalty rates for now pending further details from timber players. It also maintained its earnings forecasts for the overall timber sectors for now.
Its top picks were Ta Ann Holdings Bhd (Ta Ann) with a fair value of RM7.60 per share and Evergreen Fiberboard Bhd (Evergreen).
For Ta Ann, the research firm stated that earnings would be driven mainly by its plantation division while any further upside to the plywood division would further boost its earnings.
Meanwhile, structural changes in the industry that was the gradual increase in real demand and supply shortages from the closure of plants would be major boosters to capacity utilisation and average selling prices and thus, earnings for the Evergreen group.