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Saturday, 20 May 2017

Ta Ann confident export log prices will remain robust

Wong: ‘Prices are likely to remain range-bound but are expected to pick up as the construction activities related to the Tokyo Olympics 2020 commence.’

Wong: ‘Prices are likely to remain range-bound but are expected to pick up as the construction activities related to the Tokyo Olympics 2020 commence.’

STIFFER conditions imposed on the local timber industry in terms of lower export quotas, higher taxes and the focus on certifications have been most challenging for players operating in Sarawak.

Analysts say the prospects of the timber industry does not look promising this year as the earnings of most public-listed timber companies will likely be dragged down by unfavourable developments in the local and overseas front.

PublicInvest Research in its recent report has deemed the timber business as “no longer attractive” being hard hit by difficulties and vulnerable to risk exposure.

The earnings margin for timber players are no longer as attractive due to weaker timber product prices, lower export quota, tax hike, foreign exchange fluctuations, tightening state regulation, overcapacity in plywood segment and declining volume of log production.

The research outfit also notes: “Perhaps, we think it is about time for Ta Ann Holdings Bhd to reconsider whether it should remain in this business as the outlook is becoming more challenging.”

Ta Ann is a Sibu-based timber and oil palm plantation group with a market capitalisation of about RM1.56bil.

When contacted, Ta Ann group managing director and CEO Datuk Wong Kuo Hea maintains that continuing demand for its timber and timber products as well as increasing demand for palm oil will form the base for the growth story of the group.

He is optimistic that export log prices will remain strong in the current financial year following the reduction in supply due to the 30% export quota imposed by Sarawak state government.

In the first half of this year, export log prices averaged at US$250 per cubic m with “a potential upside”.

Wong also envisaged plywood prices, which averaged around US$430 per cubic m in the first quarter 2017, “still have yet to recover compared with the US$447 per cubic m average in its financial year 2016.”

“Our plywood division is increasing the use of planted plantation logs such as acacia as components for our plywood products.

“Prices are likely to remain range-bound but are expected to pick up as the construction activities related to the Tokyo Olympics 2020 commence,” he adds.

Wong points out that Ta Ann would continue to harvest more acacia logs from its forest plantations to offset the expected reduction in log output from natural forests in the near term.

Ta Ann has about 40,000ha of forest plantations which have reached maturity and the potential harvestable volume could be 150,000 cubic m a year and more.

At the same time, the group’s sawmilling division has adopted a three-pronged strategy to enhance the value of its product line via promotion of selected hardwood sawn timber such as Ubah, Keranjuu and Selonsor in India, stepping up manufacturing of furniture using selected exotic timber species including Arau and targeting niche markets for its moulding products.

For 2017, Wong expects Ta Ann logs production to drop by about 30% from FY2016 levels as “our forest management units (FMUs) undergo certification in Sustainable Forest Management (PEFC-MTCS).

“Export volume will also decline correspondingly as it is related directly to overall production volume of logs (30% export quota),” he adds .

Nevertheless, the group believes that in the longer term, by having certified FMUs with 60 years tenure will ensure the sustainability of its logging and timber business.

“We are making short-term sacrifices for long-term gains,” explains Wong.

Meanwhile, Wong says the recent hike in hill logs cess to RM50 per cubic m by the Sarawak state government would be “an added cost” to Ta Ann Group and the industry at large.

It was reported recently that about 50% of Ta Ann’s timber comes from hill logs and the rest from swamp logs.

Wong was quick to add: “We believe the impact on our bottom line earnings will be cushioned by favourable prices of export logs.”

Sarawak Timber Association is believed to have appealed to the state government to offer the cess at RM20 per cubic m but the proposal was turned down.

Most Sarawak timber industry players were mostly disappointed by the hike in timber tax by over 6,000% to RM50 per cubic m from 80 sen per cubic m effective July 1.

Wong opines that the state government’s decision was made without considering the current market situation especially the performance of the downstream products which has become more competitive.

“I believe eventually Sarawak timber and plywood manufacturers will lose their export markets particularly to Japan whereby the timber industry there is subsidised by the government.”

Presently, the timber export quota from July 1, 2016 to June 30, 2017 has been set at 30%.

“Ta Ann is not aware of any plans by the Sarawak state government to further reduce this quota.

“But I understand that the Sarawak Timber Association which represents the industry here is in the process of making an appeal for a higher export quota,” says Wong.

Commenting on its palm oil division, Wong notes that it will continue to be the main earnings contributor to Ta Ann Group in the current financial year.

He says stronger crude palm oil (CPO) prices in the first quarter, higher fresh fruit bunches production volumes driven an increase in matured areas, better age profile of palm trees and a pick up in production post El-Nino are expected to contribute to an increase in palm oil earnings.

In addition, Ta Ann has contracted 7,000 tonnes of forward sales monthly for a portion of its CPO output for the remaining of the year at relatively good prices, which are above the current CPO spot prices.

Overall, Wong expects the palm oil division earnings to perform “substantially above what was achieved in its pre-tax profit of RM105.6mil in FY2016.

“This will be dependent on the actual CPO price performance in the second half of 2017,” Wong says.

Tags / Keywords: Ta Ann

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