Timber - Still in the woods
Recommendation: Neutral
Share prices of timber stocks that we cover fell 4% in 2014, although they outperformed the market by 2% pts over the same period. We expect timber earnings to rise significantly this year but weak palm oil prices could mean that any re-rating of the sector will be limited. We maintain our Hold calls on Jaya Tiasa, Ta Ann and Eksons. The sector remains a Neutral. We prefer Ta Ann as it offers the highest dividend yield.
We maintain our Hold calls on Jaya Tiasa, Ta Ann and Eksons. The sector remains a Neutral. We prefer Ta Ann as it offers the highest dividend yield.
2014 in review
Sarawak export log and plywood prices rose c.5% yoy in 2014. Despite the better selling prices, Jaya Tiasa and Eksons recorded lower timber earnings in 9M14 due to lower log production and rising plywood production cost. Only Ta Ann achieved higher timber earnings as its plywood division unexpectedly turned in a profit while log production rose 33%.
Expect better earnings
This year, we expect the average price of Sarawak export logs to rise by US$10-15 per m³ (5-7%) but plywood could decline around US$10 per m³ (c.2%). We believe log prices will be supported by tight supply and stronger demand. Sarawak’s log production has declined more than 30% in the past decade. This trend is unlikely to reverse as timber stocks in the concession areas deplete. The ongoing export ban by Myanmar will also restrict tropical log supply in the export market. On the other hand, log demand should improve on the back of a stronger Indian economy. We, however, expect plywood prices to decline slightly as a result of the weak yen and sluggish consumer confidence in Japan. Nonetheless, we still believe companies under our coverage will achieve an average growth of 25% in timber earnings in 2015, helped by the weak ringgit and stronger log prices. The ringgit, which lost 6% of its value against the US$ last year, will be the key earnings growth driver given that timber products are priced in US$ while production costs are mostly RM-denominated. Although plywood demand may soften, the earnings impact from lower plywood prices should be offset by the weaker ringgit.
Weak palm oil prices
Although we project a better 2015, we see limited upside in timber stocks due to the unexciting earnings outlook for their non-timber businesses. Valuations of Jaya Tiasa and Ta Ann have been driven more by earnings from palm oil than from timber. The current CPO price of RM2,322 remains below our full-year forecast of RM2,460 per tonne; there is downside risk to palm oil earnings if CPO prices stay at the current level. The earnings outlook for Eksons is also unexciting as its plans to expand its property business are unlikely to generate earnings in the near term.
Source: CIMB Daybreak - 22 January 2015
Recommendation: Neutral
Share prices of timber stocks that we cover fell 4% in 2014, although they outperformed the market by 2% pts over the same period. We expect timber earnings to rise significantly this year but weak palm oil prices could mean that any re-rating of the sector will be limited. We maintain our Hold calls on Jaya Tiasa, Ta Ann and Eksons. The sector remains a Neutral. We prefer Ta Ann as it offers the highest dividend yield.
We maintain our Hold calls on Jaya Tiasa, Ta Ann and Eksons. The sector remains a Neutral. We prefer Ta Ann as it offers the highest dividend yield.
2014 in review
Sarawak export log and plywood prices rose c.5% yoy in 2014. Despite the better selling prices, Jaya Tiasa and Eksons recorded lower timber earnings in 9M14 due to lower log production and rising plywood production cost. Only Ta Ann achieved higher timber earnings as its plywood division unexpectedly turned in a profit while log production rose 33%.
Expect better earnings
This year, we expect the average price of Sarawak export logs to rise by US$10-15 per m³ (5-7%) but plywood could decline around US$10 per m³ (c.2%). We believe log prices will be supported by tight supply and stronger demand. Sarawak’s log production has declined more than 30% in the past decade. This trend is unlikely to reverse as timber stocks in the concession areas deplete. The ongoing export ban by Myanmar will also restrict tropical log supply in the export market. On the other hand, log demand should improve on the back of a stronger Indian economy. We, however, expect plywood prices to decline slightly as a result of the weak yen and sluggish consumer confidence in Japan. Nonetheless, we still believe companies under our coverage will achieve an average growth of 25% in timber earnings in 2015, helped by the weak ringgit and stronger log prices. The ringgit, which lost 6% of its value against the US$ last year, will be the key earnings growth driver given that timber products are priced in US$ while production costs are mostly RM-denominated. Although plywood demand may soften, the earnings impact from lower plywood prices should be offset by the weaker ringgit.
Weak palm oil prices
Although we project a better 2015, we see limited upside in timber stocks due to the unexciting earnings outlook for their non-timber businesses. Valuations of Jaya Tiasa and Ta Ann have been driven more by earnings from palm oil than from timber. The current CPO price of RM2,322 remains below our full-year forecast of RM2,460 per tonne; there is downside risk to palm oil earnings if CPO prices stay at the current level. The earnings outlook for Eksons is also unexciting as its plans to expand its property business are unlikely to generate earnings in the near term.
Source: CIMB Daybreak - 22 January 2015
