Timber sector
Maintain “neutral”: We recently downgraded the timber sector to “neutral” (from “overweight”) on the back of a downward revision in our crude palm oil (CPO) price assumptions. While we continue to like the sector on a stand-alone basis on promising prospects for the log subdivision, this is offset by the flattish outlook for the plywood segment due to the unexciting demand prospects from Japan and weaker outlook for CPO prices.

Despite a 6.9% year-on-year (y-o-y) increase in log production in Sarawak in the first quarter of 2014 (1H14), export log prices rose 16% y-o-y in August on the back of a stronger demand from India. On the plywood front, however, the impact of Japan increasing its sales tax, the seasonal slowdown during the summer holiday months as well as the weakening yen have led to slower housing starts. As a result, plywood demand has slowed even though prices remain relatively flat y-o-y. On the CPO front, while fresh fruit bunch (FFB) production growth will continue to be in the double digits for Jaya Tiasa Holdings Bhd (“sell”, target price (TP) of RM1.81) and Ta Ann Holdings Bhd (“neutral”, TP of RM3.80) this would be offset by the weaker CPO prices.

Going forward, although we expect continued strong log demand, rising log prices and increasing FFB production from improving maturity of oil palm plantations hectarage, these would likely be offset by weaker plywood volume and lower CPO prices.

We maintain our target 2015 forecast price-to-earnings ratio of 10 times to 12 times for the timber division and 16 times for the plantation division. We keep our “neutral” recommendations on Ta Ann and WTK Holdings Bhd (TP of RM1.32) with WTK being the purest timber play under our coverage.

We also retain our “sell” recommendation on Jaya Tiasa due to its rich valuations. — RHB Research, Oct 8

This article first appeared in The Edge Financial Daily, on October 9, 2014.