This article first appeared in Capital, The Edge Malaysia Weekly on May 1, 2017 - May 7, 2017

ALTHOUGH the stock markets are flourishing on a surge in optimism, local timber stocks remain unexciting.

Ending at 1,768.06 points last Friday, local bellwether FBM KLCI has risen 7.7% year to date. Small caps have done even better, with the FBM Small Cap Index gaining 20% YTD. It closed at 17,661.72 points.

In comparison, the share price performance of timber stocks has been mixed, thanks to the absence of interesting themes and re-rating catalysts, among other reasons.

For instance, the Big Three — Ta Ann Holdings Bhd, Jaya Tiasa Holdings Bhd and WTK Holdings Bhd — saw their share prices decline 4.3%, 12% and 1% respectively YTD (see table).

Jaya Tiasa’s sister company Subur Tiasa Holdings Bhd — both are in Sarawak timber tycoon Tan Sri Tiong Hiew King’s Rimbunan Hijau Group — also saw its share price drop by a slight 0.7%.

On a positive note, the share price of NWP Holdings Bhd, Timberwell Bhd and Minho (M) Bhd advanced 12.5%, 10.2% and 6.4% respectively.

Coincidentally, shares of Priceworth International Bhd and Leweko Resources Bhd jumped 127.3%, making them the top two performing timber stocks by far this year. Golden Pharos Bhd’s share price soared 40.4%.

Overall, it seems that the small-cap timber stocks have outperformed their mid and large-cap counterparts. Other than Ta Ann, Jaya Tiasa and Subur Tiasa, the rest are penny stocks, which by definition are priced at less than RM1.

However, it is worth noting that most of the timber companies do not have strong fundamentals. Some are suffering financial losses or reporting minimal profits, while the profitable companies do not seem to be paying generous dividends.

In fact, only Ta Ann, Jaya Tiasa and WTK have been paying regular dividends in the past 12 months, but the Big Three were only offering a dividend yield of less than 3%, roughly the average for fixed deposit rates in Malaysia.

GSR Pte Ltd director Paul Chong says the timber industry has remained at status quo for quite some time, as the local players have been heavily affected by the short supply of logs. “For some timber firms, their fundamentals remain unchanged and investors may not see where new growth could come from without a sustainable supply (of logs),” he tells The Edge.

GSR is the Singapore subsidiary of Priceworth, a Sandakan-based integrated timber operator. “As far as Priceworth is concerned, we are acquiring a sustainable forest management unit that will be our game-changer as we will have secured a sustainable supply, which will fundamentally transform the company,” says Chong.

“For this reason, RHB Banking Group founder Tan Sri Abdul Rashid Hussain saw our value proposition and participated by taking up 10% of the special issue shares. His participation has created great interest in our shares,” he explains.

Commenting on the overall timber price trend, Priceworth executive director Richard Koo Jenn Man says it remains quite stable, despite the fact that prices have decreased “a little bit” in the past few months.

“During the winter period, between December and January, the construction industry in China and Japan will experience a slowdown, so demand decreases accordingly. Normally, it will only pick up from March onwards. The exchange rate, however, is still favourable to us,” he says.

Koo adds that unlike crude palm oil (CPO), there is no standard contract for timber. “Timber is not a commodity. It doesn’t actually have a uniform, benchmark price in the global market. It really depends on the species, grade and size,” he adds.

“We will always see earnings volatility in timber companies because there’s no global timber price to gauge their financial performance,” says a senior equity analyst at a local research house.

He adds that sector rotation usually occurs in the stock market and the fact that timber stocks have been lagging behind has not gone unnoticed.

“Rewind back to 2015. The export-oriented companies grabbed all the attention because they were seen as the main beneficiary of the stronger US dollar. Now that the foreign exchange market is relatively stable, some timber and timber-related counters are quite cheap in terms of stock valuation,” he says.

Interestingly, companies such as Ta Ann, WTK, Jaya Tiasa and Subur Tiasa have been diversifying into oil palm plantation and related activities.

However, “new business diversification” is no longer a re-rating catalyst for these timber firms, considering that the rally in CPO prices is expected to be unsustainable, given the abundance of CPO supply coming into the market in the second half of this year.

According to RHB Research analyst Stephanie Cheah, demand for CPO from China and India is expected to remain sluggish, despite the relatively low stock levels in Malaysia and Indonesia.

“We have lowered our 2018 CPO assumption to RM2,400 per tonne, down from RM2,500 per tonne,” she says in an April 5 report.

So, should the timber companies diversify?

“It depends on your strength. If you can secure a timber concession, your growth story could be much more interesting than the plantation companies’. But if your strength is not in securing a timber concession and you venture into oil palm, which has been very stable all this while, your risk factor is very much reduced and you will have stability,” says a timber industry veteran.

Simply put, it depends on investors’ risk appetite.

RHB Research’s Cheah remains “neutral” on the timber sector as she expects plantation valuations to moderate during a CPO price downtrend.

Jaya Tiasa remains the research house’s top pick and only “buy”, with a lower target price of RM1.53, down from RM1.61. “Given the sizeable oil palm land bank of the group and our expectations of higher CPO prices in 1H2017, we think it is on the right track to post a stronger 2HFY17 earnings,” Cheah says.

RHB Research remains “neutral” on Ta Ann and WTK. The research firm revised its target price for Ta Ann to RM3.91 (from RM4.08) and WTK to 98 sen (from 95 sen).

“Ta Ann is currently trading at 11 times FY17 PER (price-earnings ratio) but with a comparably lower three-year earnings CAGR (compound annual growth rate) growth of 7%. WTK continues to be dragged down by its oil and gas operations and a slowing trading segment. WTK is currently trading at 15 times FY17 PER,” says Cheah.

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