Higher production costs for Sarawak timber players, says CIMB Research

Clogged up: Work being carried out to clear the Bambangan intake point.

KUALA LUMPUR: CIMB Equities Research expects Sarawak timber companies to face higher production costs after the state increases the cess payment for hill timber from 80 sen to RM50 per cubic metre starting from July 1, 2017.

The research house said on Friday it was negative on this news, as it will result in higher cost of production for logs of around RM49.20 per cubic metre, for timber logged from hills. 

“We estimate that this represents an increase of 14% in the cost of production for logs in Sarawak. The timber players may not be able to pass on the higher levy to consumers,” it said.

It pointed out Jaya Tiasa and Ta Ann’s timber earnings contribution will be negatively impacted by the new levy due to their exposure to timber businesses in Sarawak. 

“We gather that c.50% of Ta Ann’s timber comes from hill logs, while the remaining are swamp logs,” it said.

Assuming Ta Ann produces 350,000cu m of logs in 2017 as well as 2018, and 50% of the timber is from hill logs, we estimate the hike in levy could raise the group’s cost of production by RM8.6mil. 

However, given that the levy will only be enforced starting July 1, the higher costs will only impact 2HFY/17 earnings. 

“We estimate the potential negative impact on our net profit forecasts to be 2.4% for FY17 and 4.5% for FY18,” it said.

As for Jaya Tiasa, assuming it produces 450,000cu m of logs in 2017 and 2018, and 70% of the timber are from hill logs, CIMB Research estimates the hike in levy could raise the group’s cost of production by RM15.5mil. 

“The levy will not impact Jaya Tiasa’s FY6/17 earnings (as it will only be effective July 1) but could reduce our FY6/18 net profit forecast by 10%,” it said.

CIMB Research said its Hold ratings on Jaya Tiasa and Ta Ann are intact, pending clarification from management. Its Neutral rating for the sector is intact as the weak timber earnings will be partially offset by rising output from its plantation division.

To recap, Sarawak will increase the cess payment for hill timber from 80 sen to RM50 per cubic metre starting July 1, 2017.

Sarawak's Assistant Minister of Urban Planning, Land Administration and Environment Datuk Len Taliff Salleh explained:

“We are looking at RM200mil to RM300mil collection under the new rate, compared to about RM15mil under the present rate."

He added Sarawak needs a lot of money for the education fund.

Len pointed out Chief Minister Datuk Amar Abang Johari Openg was unhappy with timber companies which have reneged on their promises to plant certain species of trees in areas previously logged.

Currently, half of the 300,000 hectares in planted forests were the result of the state government’s efforts.

Abang Johari Openg said the increase was timely as the rate has remained unchanged for over three decades. 

He explained that the hike was meant to drive timber firms towards planting forests, while the cess payments collected would be channelled to the Sarawak Foundation for its education programmes.
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