Jaya Tiasa Holdings Bhd
(April 27, RM1.65)
Sell with a target price of RM1.50: For the nine months ended March 31, 2015 (9MFY15), Jaya Tiasa’s total log production fell by 8% to 694,403 cu m, and its fresh fruit bunch (FFB) production was down by 8.7% year-on-year (y-o-y) to 546,951 tonnes. These declines were partly attributable to: (i) heavier rainfall that affected the harvesting process of logs and FFB; (ii) termination of the main contractor for both the logging and oil palm plantation activities; and (iii) a shortage of labour.

In view of the production and logging concerns, we cut our financial year ending June (FY15) to FY17E (estimated) core earnings per share (EPS) by 11% to 36% after imputing: (i) a 7% lower log production assumption for FY15 to FY17E to 938,400 tonnes; (ii) a lower FFB production assumption given a 13% to 17% lower FFB yield in FY15 to FY17E (from 15.5% to 19%); and (iii) higher FFB costs of RM300 per tonne (from RM290 per tonne).

With an unfavourable risk-reward ratio, we downgrade Jaya Tiasa to “sell” (from “hold”) and our sum-of-parts-derived 12-month target price is lowered to RM1.50 (from RM1.75). This is based on 11 times estimated calendar year 2016 (CY16E) price-earnings ratio (PER) for its timber division, 14 times PER for its plantation division, and one times book value for its forest plantation. At a CY16E PER of 22.2 times, we believe the stronger earnings prospects from its plantation division due to increasing matured areas are already priced in.

The upside risks to our “sell” rating would be: (i) stronger-than-expected economic growth in the key import markets, which should help boost demand for timber products; (ii) higher-than-expected log and plywood production; (iii) higher-than-expected FFB and crude palm oil (CPO) production; and (iv) a sharp increase in average selling prices for timber, FFB and CPO products. — AffinHwang Capital, April 27

This article first appeared in The Edge Financial Daily, on April 28, 2015.