KUCHING: Analysts believe that Malaysia’s timber sector still lack earnings drivers, as challenges in the form of weak sales volume or still soft timber prices continue to weigh on the sector.
RHB Research Sdn Bhd (RHB Research) highlighted this in a recent report, and noted that expectations of a stronger ringgit in 2017 also point to a tapering currency windfall.
“We think log earnings could remain unexciting due to continued weakness in earnings drivers,” it opined.
It added that while there is a recovery in log harvests, Ta Ann Holdings Bhd’s (Ta Ann) log sales volume has not followed suit, with a decline of 27.3 per cent year-on-year (y-o-y) in the first half of 2016 (1H16) while Jaya Tiasa Holdings Bhd’s (Jaya Tiasa) sales volume had plunged 30.7 per cent y-o-y in the same period.
“Benchmark Meranti prices have stayed range-bound at US$270 to US$275 per cubic metre since the start of the year. They are likely to remain so in our opinion, as economic activity in key export markets such as India plateaus,” it opined.
The research team also pointed out that while expectations of a stronger ringgit of RM3.85 per dollar in 2017 compared with RM4.01 per dollar in 2016 might present a case for log price recovery, several factors could impact log prices.
These include the expected economic slowdown/plateau in key export markets such as India and the availability of other log supply sources such as Solomon Islands and Papua New Guinea, it added.
In addition to that, RHB Research highlighted that the reduction of the log export quota to 30 per cent (from 40 per cent) from July is likely to be unfavourable for timber companies as exported logs command the best margins.
“However, we think the impact ought to be relatively measured, as log export levels of the timber companies are already hovering near 30 per cent,” it commented.
As for the performance of the plywood sector, the research team noted that while there appears to be some recovery in the plywood sector, it is still “far from inspiring”.
It noted, the rate of decline of Malaysian plywood exports to Japan has slowed to 11.6 per cent y-o-y in 1H16, from 23.3 per cent in the first quarter of 2016 (1Q16) which was due to improved housing starts in Japan (5.7 per cent y-o-y in YTD June).
It added, according to Japan Lumber (in a August 26, 2016 report), major plywood producers in Sarawak have resorted to cutting back plywood production until the imported plywood market recovers.
“Plywood prices, such as those of concrete panels and floor bases, remain vulnerable and are still 8.6 per cent and 11.1 per cent lower respectively compared to a year ago.
“Meanwhile, the yen, which has appreciated approximately 10 per cent from 2015 levels, ought to help lower the transacted price of imported plywood for Japanese builders.
“This is as prospects of a further yen depreciation has kept some of the plywood importers on the sidelines,” it added.
With softer timber earnings, RHB Research believed that the plantations divisions of timber companies such as Jaya Tiasa and Ta Ann would now account for an estimated 50 to 80 per cent of their earnings.
Nevertheless, it pointed out that the current strong palm oil prices might not be sustained for much longer.
It said, there is the imminent spike in CPO productivity, which has been delayed to October/November, from August/September due to El Nino while the upcoming bumper soybean crop in the US (harvesting in October/November) and South America (harvesting in 2Q17) could hinder palm oil prices.
In addition, it noted that with tapering chances of a La Nina occurring, US soybean harvest is unlikely to be disrupted by extreme weather conditions, ultimately affecting rival agriculture oils such as palm oil.
“Crude palm oil (CPO) prices have averaged at RM2,552 per tonne in YTD 2016 – at the time of writing – and we maintain our CPO prices forecasts of RM2,500 per tonne across FY16 to FY18,” it projected.
Overall, RHB Research maintained a ‘neutral’ view on the sector. It noted, “Our concerns such as weaker log and plywood sales remain, while stronger plantation earnings are priced in.”