Jaya Tiasa to gain from weakness in ringgit, strength in log dynamics

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Jaya Tiasa stands to benefit from current weakness in the ringgit as well as its strength in log dynamics.

Jaya Tiasa stands to benefit from current weakness in the ringgit as well as its strength in log dynamics.

KUCHING: Jaya Tiasa Holdings Bhd (Jaya Tiasa) stands to benefit from current weakness in the ringgit as well as its strength in log dynamics.

However, analysts believe this would be offset by losses at its plantations division and weakness in plywood demand and pricing.

According to RHB Research Institute Sdn Bhd (RHB Research), this comes as the group saw its logging quota reduced by 13.3 per cent.

“During the recent logging quota annual review, Jaya Tiasa’s logging quota was reduced by 13.3 per cent to 936,000 cubic metres per annum from 1.08 million cubic metres.

“We had warned of this potentially happening in our previous sector report as the Sarawak State Government is revamping its timber licensing policy,” the firm said.

“This is in light of its renewed commitment to sustainability and conservation. We highlight that none of the other timber companies we cover have had their logging quotas cut during the recent July annual review.”

Despite this cut, RHB Research does not expect Jaya Tiasa to be able to log to quota this year, given that the year-to-date August log harvests were at 494,000 cubic metres only, comprising just 53 per cent of the total revised annual quota.

“We have, therefore, cut Jaya Tiasa’s log production forecasts to reflect a decline of six to seven per cent in FY16, followed by a smaller three to four per cent drop in FY17.

“In 2MFY16, log production was down 7.5 per cent year on year (y-o-y), while FY15’s was down 14.3 per cent y-o-y. Our assumptions do not take into account any extreme weather patterns like El Nino, which would make the transportation of logs difficult due to low river levels.”

The firm also observed that the Sarawak State Government reduced export log quotas to 40 per cent from 50 per cent in July.

“Although this is being appealed, we have reduced Jaya Tiasa’s log exports to 40 per cent for now (from 45 per cent) to take this change in regulation into account.”

In the meantime, log prices remain on the rise, as RHB Research expects log prices to remain firm over the medium term with this supply reduction.

In the fourth quarter of 2015 (4Q15), Jaya Tiasa’s average log selling price was US$214 per cubic metre, up six per cent quarter on quarter (q-o-q), but down one per cent y-o-y.

In ringgit terms, however, average log prices rose seven per cent q-o-q in 4Q15 and 13 per cent y-o-y.

This was due to the benefit from the weak ringgit-US dollar exchange rates.

“Management continues to see stable demand coming from India, which means prices are likely to continue their rising trend.

We have projected average log prices to rise eight to 10 per cent in FY16 and FY17, followed by two per cent in FY18.

“As for log production costs, this has remained relatively stable at around RM380 per cubic metre.” RHB Research raised earnings forecasts for Jaya Tiasa to reflect the change in exchange rate assumptions, pushing up its net profit forecasts by 20 to 35 per cent for FY16 to FY18.

“There is no change to our neutral recommendation to the stock. Catalysts to look out for would be a sustainable increase in crude palm oil price trends and a turnaround of its plantations operations, which are running at very high costs currently.”