This article first appeared in The Edge Financial Daily, on December 14, 2015.

KUALA LUMPUR: Sarawak-based timber companies are expected to have a strong showing in the fourth quarter of this year (4Q15), provided the ringgit continues to trade at weak levels against the US dollar, say analysts.

Last Friday, the ringgit was trading at 4.2965 against the US dollar. PublicInvest Research analyst Chong Hoe Leong said export-driven timber companies are expected to continue to benefit from the weak ringgit effect.

“As the US dollar continues to strengthen against the ringgit, I do see an upbeat outlook for the timber sector in 4Q15 [assuming a status quo in selling prices],” he told The Edge Financial Daily.

One timber company that stood out in the latest round of earnings season was Ta Ann Holdings Bhd, which saw its net profit jump 55% to RM67.42 million in the third quarter ended Sept 30 of financial year 2015 (3QFY15). The increase was partly attributed to better export log prices which are denominated in US dollars and plywood selling operations. Revenue for 3QFY15 had also come in 5% higher at RM298.91 million.

MIDF Research in its Nov 17 note on Ta Ann said prices of logs for export are expected to stay stable as Myanmar’s log export ban last year kept the supply of tropical timber tight.

“For Ta Ann, the growth drivers not only come from timber export play, but the plantation growth is coming in well due to its palm’s young age profile, rebound in crude palm oil prices and strong fresh fruit bunches production growth,” he said.

Areca Capital chief executive officer Danny Wong opined that having a diversified set of earnings is a good strategy for companies to adopt.

“It is better for companies to diversify their earnings base, especially when it comes to businesses that complement each other. Therefore companies that are able to realise these synergies would be able to reap its benefits,” said Wong.

However, there are challenges in store for the timber sector in the upcoming quarter. Besides the risk that the ringgit may rebound against the US dollar, the weather factor also poses a challenge, points out RHB Research analyst Hoe Lee Leng.

“Weather risks will always be there particularly since extreme weather situations like El Nino can have an impact on harvesting activities,” said Hoe.

In May the Malaysian Anti-Corruption Commission (MACC) launched a crackdown against illegal loggers in Sarawak. Following that, timber companies like Jaya Tiasa Holdings Bhd and Ta Ann had come out to say they were not involved in any illegal logging activities.

On whether this would have any precedence on the performance of timber companies, one bank-backed analyst opined that it does.

“MACC officers were placed at the timber concession forests earlier this year to check if the logs harvested were illegal. This slowed down the log harvesting process and hence caused a drop in production numbers,” said the analyst.

In terms of its perception on investors, Wong said, “International investors do watch such developments closely, so yes it does have an impact from an investing point of view.” 

Timber companies which are on the radar of analysts include Ta Ann, WTK Holdings Bhd and Jaya Tiasa. 

“Ta Ann is still our preferred stock for timber exposure, mainly for its earnings growth and also its dividend yield. The stock has one of the highest dividend yields among timber and plantation stocks,” said one analyst.

For FY14, Ta Ann paid out gross dividend per share of 20 sen, which worked out to a yield of 4.3% based on its closing price of RM4.63 last Friday.

WTK reported a 78.1% jump in net profit for 3QFY15 to RM21.2 million from RM11.9 million a year ago, thanks to the increase in the volume of plywood product sales, and also the stronger US dollar. Revenue for the quarter was also up 23% to RM191.31 million.

Jaya Tiasa reported a 2.6% increase in net profit for 1QFY15 to RM24.13 million on the stronger greenback, and a higher profit margin from its timber division. Revenue for the quarter, however, dropped 5.4% to RM247.62 million, due to a decrease in log and plywood sales volume.

Last Friday, Ta Ann (fundamental: 2.3; valuation: 2) shares closed three sen or 0.64% lower to RM4.63 with a market capitalisation of RM1.73 billion.

WTK (fundamental: 1.65; valuation: 1.4) shares were down two sen, or 1.67% to RM1.18 with a market capitalisation of RM572.99 million, while Jaya Tiasa (fundamental:0.3; valuation: 1.4) shares were down one sen or 0.87% to RM1.14, giving it a market capitalisation of RM1.11 billion.

The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.