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This article first appeared in The Edge Financial Daily on January 8, 2020

Jaya Tiasa Holdings Bhd
(Jan 7, RM1.02)
Maintain buy with a higher target price (TP) of RM1.55:
We expect Jaya Tiasa Holdings Bhd’s earnings to turn around in financial year 2020 (FY20), mainly driven by its oil palm plantation division and largely underpinned by a higher crude palm oil (CPO) production and a recovery in CPO price.

Our FY20 to FY22 core earnings per share (EPS) forecasts are increased by 1% to 46%, mainly to factor in a likely higher contribution from the plantation division, partially offset by a lower timber contribution. In tandem with our earnings upgrade, our 12-month sum-of-parts (SOP)-derived TP for Jaya Tiasa is raised to RM1.55. Our “buy” call is maintained.

We forecast Jaya Tiasa’s future earnings to be mainly derived from the palm oil division. We expect Jaya Tiasa’s oil palm plantation division’s FY20 to FY22 estimated earnings to be driven by a rising CPO production — as more plantation areas reach their prime age and a higher oil extraction rate — and better selling prices.

We expect higher CPO price in FY20 mainly because of stronger demand growth for palm oil products, especially from the food and energy industries, compared with production growth. For Jaya Tiasa, we forecast average selling prices (ASPs) of CPO at RM2,350 to RM2,600 per tonne for FY20 to FY22.

Demand for tropical hardwood logs and plywood softened in 2019, mainly due to a stiff price competition. We forecast Jaya Tiasa’s log and plywood ASPs at RM690 to RM760 per cubic metre (m3) (FY19: RM717 per m3) and RM2,050 to RM2,240 per m3 (FY19: RM2,332 per m3) respectively for FY20 to FY22.

We reckoned log and plywood prices should improve over some time given a prolonged supply shortfall as a result of declining yearly production due to diminishing natural resources. We assume higher plywood production cost for FY20 to FY22 at RM2,500 to RM2,600 per m3, from RM2,000 to RM2,100 per m3 previously, mainly due to lower plywood production volumes. Our log production cost assumptions for FY20 to FY22 are kept at RM460 to RM475 per m3.

Our FY20 to FY22 core EPS forecasts are raised by 1% to 46%, mainly to factor in a higher contribution from the plantation division, partially offset by a weaker contribution from the timber division. Our SOP-derived TP for Jaya Tiasa is raised to RM1.55, based on unchanged targets of eight times FY21 estimated price-earnings ratio (PER) for the timber division, 21 times FY21 estimated PER for the plantation division and one times price-to-book ratio for the forest plantation division. Our “buy” call is maintained. — Affin Hwang Capital, Jan 7

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