Wednesday, April 24

Timber sector remains firm given robust fundamental outlook

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STRONG FUNDAMENTALS: The strong demand from India and China are still supportive of log prices, despite having eased by US$15 to US$20 per cubic metre recently, due to improving log production in Sarawak.

KUCHING: Malaysia’s timber sector recieves a favourable outlook given its robust near-term earnings growth due to strong log prices owing to huge demand from India and China as well as the strong plywood prices due to increased demand from Japan for reconstruction.

According to the latest ‘Japan Lumber Report’, there has been a build-up of imported plywood inventory in Japan due to the arrivals of orders placed after the earthquake disaster. The rise in inventory was mainly for thick plywood such as concrete plywood (CP) and structural plywood (SP), which were mainly used in construction activities.

As a result, prices for CP and SP reported by timber companies had weakened recently from its peak of US$630 per cubic metre in May/June to between US$540 and US$560 per cubic metre. “We do not think there will be a further decline in CP and SP prices, as current prices are close to the prices realised prior to the earthquake,” said RHB Research Institute Sdn Bhd (RHB Research) analyst Toh Woo Kim.

Toh further stated that the build-up of inventory in Japan and its effect on CP and SP prices were temporary, as it was just a matter of time before reconstruction activities in Japan started to take place. “Once reconstruction activities start, we believe plywood inventory should begin to run down and this will provide positive momentum to CP and SP prices again,” he added.

However, given the current political disagreement over ways to finance the reconstruction process in the country, the timing of reconstruction was likely to be delayed. The research firm believed reconstruction activities would only take place by the fourth quarter of the year, at the earliest.

Based on prices reported by timber companies, prices for thin panel plywood such as floorbase plywood (FB) had remained firm between US$740 and US$780 per cubic metre, compared with its pre-earthquake level of between US$660 and US$710 per cubic metre.

“Unlike CP and SP, there is no inventory build-up for FB plywood in Japan currently. As FB plywood is generally required only for the later part of the reconstruction activities, there have not been any very large and rushed orders from Japanese importers after the earthquake in March,” Toh pointed out.

RHB Research revised its FY11-13 plywood average selling price assumptions for thick panel plywood (CP and SP) from between US$630 and US$650 per cubic metre to between US$570 and US$630 per cubic metre. This had resulted in slight decline of one per cent to seven per cent on its blended plywood ASP assumptions for timber companies.

“Generally, there is no significant impact to our blended plywood ASP assumptions, as the weakness in plywood prices are only in the thick panel segment. In addition, sales mix for the timber companies that mainly export to Japan such as WTK Holdings Bhd (WTK), Ta Ann Holdings Bhd (Ta Ann) and Lingui Development Bhd (Lingui), are mainly concentrated on thin panel plywood,” said RHB Research.

It estimated the impact was the highest for Jaya Tiasa Holdings Bhd (Jaya Tiasa), as its sales mix was more concentrated on the thick panel segment compared with the other timber companies.

“Overall, we still remain positive on the timber sector as Japan housing starts to improve gradually, even though reconstruction activities have yet to take place. It started to rise at plus 0.3 per cent and plus 6.4 per cent year-on-year (y-o-y) in April and May 2011 respectively, after a minus 2.4 per cent y-o-y decline in March 2011,” Toh revealed.

Other than that, the strong demand from India and China are still supportive of log prices, despite having eased by US$15 to US$20 per cubic metre recently, due to improving log production in Sarawak.

Among the risks that were brought into consideration included the lower than expected improvement in Japan’s housing starts and the price discounting from neighbouring countries which would lower cost of production, resulting in lower exports from Malaysia to its major export markets.

Based on the given factors, RHB Research reduced its FY11-13 earnings forecasts for timber companies under its coverage by between 0.8 per cent and 12.4 per cent.

For Jaya Tiasa and Ta Ann, it pointed out that there would also be significant boost to their earnings from the plantation division going forward due to increasing fresh fruit bunch production, apart from the strong earnings contribution from the timber division.

To conclude, RHB Research pegged Jaya Tiasa’s fair value at 10.39 per share, Ta Ann at RM8.38, WTK at RM2.99 and Lingui at RM2.51.