Jaya Tiasa Holdings Bhd
(April 5, RM1.22)
Maintain buy call with a target price (TP) of RM1.53: We maintain our thesis that the price of crude palm oil (CPO) would be on a downtrend from here on. The price of CPO hit a high of RM3,300 per tonne in January before moderating to the RM2,900 per tonne level currently.

We believe the rally is unsustainable, given the abundance of CPO coming into the market in the second half of 2017 (2H17). This is on top of the sluggish demand outlook, which is not expected to recover to previous growth levels of 5% to 6% per annum, despite the currently still relatively low stock levels in Malaysia and Indonesia.

After taking into account the actual CPO price per tonne of RM2,600 realised by Jaya Tiasa Holdings Bhd in June to December 2016 as well as our assumption of RM2,900 for the January to June period, we raise our financial year 2017 (FY17) (June) average CPO price per tonne to RM2,700 (from RM2,600).

We also cut our FY18 price per tonne assumption to RM2,400 (from RM2,500) to account for our expectations that prices may continue to decline.

All in, our earnings forecast is revised upwards by 5.8% for FY17 and lowered by 4% for FY18. We expect the group to post a strong fresh fruit bunch production growth of 12% year-on-year for FY17 (Eight months of FY17: 10%) on the back of increasing prime mature trees which are estimated to make up 65% of Jaya Tiasa’s total planted area by June 2017.

We lower our sum-of-parts-based TP for Jaya Tiasa to RM1.53 (from RM1.61) based on a lower 16 times FY17F (forecast) price-earnings ratio (PER) (from 17 times) for the plantation division. Despite the upgrade in our CPO price forecast to RM2,700 per tonne for FY17, we expect valuations to moderate going forward.

Historically, PER valuations usually shrink by one to two standard deviations during a CPO price downtrend. We have also revised our discounted cash flow assumptions for the group’s log division to account for a lower cost of equity of 9.3% (from 9.6%), in line with our latest in-house assumptions.The replacement value calculation for Jaya Tiasa’s plywood unit is unchanged.

Our top pick is still Jaya Tiasa after accounting for the changes mentioned above. At current share price, Jaya Tiasa is trading at a FY17F PER of 12 times, backed by a strong three-year forecast earnings compound annual growth rate of 26%.

Given the sizeable oil palm land bank of the group with our expectations of higher CPO prices in 1H17, we think the group is on the right track to post stronger 2HFY17 earnings. — RHB Research Institute, April 5