Cautiously bullish about timber recovery


  • Business
  • Saturday, 11 Jan 2003

By DARSHINI M. NATHAN

SAME time last year, timber stocks were hardly in the radar screen of investors. Depressed timber prices, less than encouraging demand from traditional markets like Japan, South Korea and Taiwan and uncertainties clouding the global economic landscape pretty much put paid to hopes of any renewed interest in the sector. That was then. 

Now, the sector may get the break it has long waited for. After two years in the doldrums and several false starts along the way, the recovery in timber prices since May last year is beginning to be noted by market participants. Since then, prices have risen by about 30 per cent with plywood and log prices currently averaging US$300 per cubic metre and US$100 per cubic metre, respectively.  

And not surprisingly, market pundits are now claiming that the sector should not be so easily dismissed and should instead be given a second look. Many of the timber companies are already seeing interests in their stocks heating up. Counters like TA ANN HOLDINGS BHD, WTK HOLDINGS BHD and Jaya Tiasa Holdings Bhd have appreciated between 20 per cent and 70 per cent over the past one year.  

The full extent of the upswing in timber prices was captured in the earnings of timber companies in the July – Sept 2002 reporting season. Players like Jaya Tiasa, for example, bounced back to profitability with a vengeance in the first quarter of its financial year ending Apr 30, 2003, thanks to the double impact of improved timber prices and higher production. This sharp turnaround came after six consecutive quarters of losses. For other major players like Ta Ann, WTK, and SUBUR TIASA HOLDINGS BHD, it was the glory days all over again as they witnessed their fortunes improving. 

Is it sustainable? 

The question that begs asking at this point is whether this recovery is sustainable. While analysts are undoubtedly more bullish about this sector now, most of them believe that the current upswing in timber prices should be treated with caution. 

An observer says the firmer prices have more to do with the current tight supply situation rather than a real recovery on the demand side. Various factors have contributed to the supply crunch: the tightening of illegal exports of logs from Indonesia; Malaysia's ban on logs imported from Indonesia and the clampdown of illegal logging by the authorities in Sarawak. Malaysia and Indonesia together account for over 90 per cent of tropical hardwood plywood exports. 

In addition, harvesting of logs in many areas have been delayed in anticipation of higher prices. 

As for demand, the same analyst reckons that with most of the economies around the world on tenterhooks, currently, global demand particularly from traditional markets like Japan, South Korea and Taiwan has not improved significantly. Generally, demand for timber products is closely related to economic growth. 

“While there's no reason to expect prices not to hold up, consumption and demand could pull back in the event that a war against Iraq breaks out. Because timber is a cyclical commodity, a recovery in the region is also needed to prolong the upswing,” he adds. 

Some expect a modest recovery 

K & N Kenanga Research, meanwhile, anticipates a modest recovery for the sector this year, barring a double-dip recession in the US. Although it expects the recovery in panel product prices to be slow because of stiff competition from China, maturing forest plantations and rising production efficiency, the brokerage reckons the arguments in favour of a continuing steady recovery in log prices are stronger. 

“Global demand for timber products for infrastructure, construction and housing is still strong. Demand in China and India is also growing and has the potential to take up the slack elsewhere,” it said in a report. 

Furthermore, with tighter control over illegal logging in Indonesia still in force and increased anti-terrorism surveillance at ports and on the high seas around the world, it will become increasingly difficult to pull off log smuggling. 

Important to note though is that while things are generally looking up for the sector, there are stumbling blocks on its path to a full-scale recovery. 

The threat of China 

For local plywood manufacturers, nothing is more daunting than the looming threat of China – a low-cost producer. The country is a force to be reckoned with, especially in plywood and veneer production, winning market share from Malaysian exports with its own exports of cheaper priced (though generally lower quality) products. But even in terms of quality, things are set to improve, fuelled largely by foreign capital and technical expertise. 

As China increasingly supplies its own needs, this has also reduced its dependence on plywood imports from Malaysia and Indonesia. 

According to the International Tropical Timber Organisation, China's plywood trade is developing at a frantic pace. Over the past few years, China's plywood imports have plunged from some 1.7 million cubic metres in 1998 to just 650,000 cubic metres in 2001. Conversely, its exports have leapt from less than 200,000 cubic metres in 1998 to almost 1 million cubic metres in 2001. 

But for now at least, the timber industry's recovery appears to be intact, with log and plywood prices at pre-crisis levels. So, rather than look a gift horse in the mouth, local timber companies would be better of revelling in their good fortune. 

Ta Ann Holdings Bhd 

IT is in a strong position to benefit from an upswing in timber prices as it has a large concession of more than 870,000 acres. According to investment portal Surf88.com, the company's valuations are attractive at less than 8x 2003 price/earnings ratio (PER) for 30 per cent earnings per share (EPS) growth.  

Currently, plywood is Ta Ann's biggest money-spinner, contributing about 60 per cent to its profits. The company expects to increase its plywood production capacity to 216,000 cubic metres a year, from 180,000 cubic metres at present, as it is in the midst of adding another line to its plywood factory.  

Ta Ann also produces laminated veneer lumber, a value-added plywood product. Its biggest client in Japan buys over 35 per cent of its output. The company's top five customers take up about 80 per cent of its output.  

For the third quarter ended Sept 30 last year, the company reported a higher net profit of RM24.13 million, against RM7.68 million a year ago.  

Ta Ann shares bought a year ago would have appreciated by slightly more than 35 per cent now. From a year's low of RM4.56 in early January last year, Ta Ann's share price trended upward to peak at RM6.30 on August 28.  

Jaya Tiasa Holdings Bhd 

The company, late last December, announced that it had locked in a further supply of logs by entering into an agreement to develop and harvest logs in a 164,000 ha plantation in Sarawak up to 2062.  

Financially, things have started to look up for the company. It made a strong profit turnaround in the first six months of its financial year ending April 2003, reporting net earnings of RM39.23 million against losses of RM52.58 million in the last comparable period. Now that it has written off its loss-making plywood operations in Brazil, K & N Kenanga says the worst appears to be behind the company. It expects Jaya Tiasa's fiscal third quarter and part of its fourth quarter to be seasonally weaker.  

Surf88, which has a “buy” call on the stock, has maintained its EPS forecast for the company at 29.5 sen for April 2003 after factoring in lower seasonality in the current quarter owing to weather conditions. This, it says, places the stock at about 12x PER, which is considered attractive for a recovery play.  

Jaya Tiasa shares bought a year ago would have appreciated by some 66 per cent now. The counter reached a year's high of RM4 on Jul 30, 2002, after testing a low of RM1.91 on February 4 last year.  

WTK Holdings Bhd 

An added boost for the company this year is the expansion of its timber concession by more than 60 per cent following the new supply agreement signed with Sarawak Timber Industry Development Corporation. In addition, WTK has also been engaged to carry out a heli-logging project at a 122,798ha spread of land in Kedah. An agreement with the state government allows the company to cut down three trees measuring 60cm in diameter in every 0.4ha of land. The timber will be transported out by helicopter. According to Surf88, these developments are expected to boost EPS by another 68 per cent in 2003.  

For the third quarter ended Sept 30, 2002, WTK reported net earnings of RM16.08 million, from RM9.24 million in the last corresponding period. An analsyt says that, for WTK, logs will continue to be its mainstay, contributing between 50 per cent and 60 per cent to its future group operating profits, particularly with the heli-logging joint project.  

Despite having appreciated by close to 20 per cent over the last one year, analysts still see potential upside for the stock. Surf88, for one, says: “WTK remains a 'buy' at about 11x 2003 PER”.  

The counter, from a 52-week low of RM3.78 in early March last year, had trended upward to touch a year's high of RM5.50 in August.  

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