Myanmar’s ban likely to impact positively on timber sector’s prospects

KUCHING: Sarawak-based timber companies are expected to benefit from higher tropical log prices as a result of Myanmar banning all log exports from April 1 to curb smuggling activities and conserve its forests

Myanmar is the fifth largest tropical log producer and third largest exporter in the Asia Pacific region while Malaysia is the region’s third largest producer and exporter.

RHB Research has maintained a positive outlook on the timber sector’s prospects in view of Myanmar’s upcoming ban on log exports and relatively stable log demand from India and Japan.

“With the ban in place, we expect tropical log prices to start rising again from 2H2014 after the existing log inventory held by importing countries decline,” it said in a March 21 report.

Based on International Tropical Timber Organisation (ITTO) figures, Myanmar produced 5.59 million cu m of logs in 2012, of which 2.35 million cu m or 42% were exported. This made up some 22% of total global tropical log exports.

According to RHB Research, when Indonesia banned log exports in 2001, Malaysia’s export market share expanded to 58% from 43%.

“As Myanmar caters to more or less the same markets as Malaysia in terms of tropical log exports, we believe that Malaysia’s log prices will be in for a re-rating.

“This is in addition to the fact that in general, Malaysia’s log production continues to be hampered by depleting natural resources, the imposition of more stringent environmental safeguards and weather abnormalities (including) global warming,” it added.

Last year, Sarawak’s log production fell 13.2% from 2012’s. Malaysian log prices surged by about17% during the same period.

RHB Research said this year’s log prices had been relatively stable around US$240-US$250 per cu m.

The research house, which maintains “overweight” on the timber sector, has a “buy” call on three Sarawak-based timber/plantation companies - WTK Holdings Bhd, Ta Ann Holdings Bhd and Jaya Tiasa Holdings Bhd.

“We lift our earnings forecasts to take into account assumptions of logs prices that are 5%-7%higher for 2014 and 2015 to US$250-US$270 per cu m from US$240-US$260 previously as well as a higher ringgit/US Dollar exchange rate of RM3.20/USD for CY14 (from RM3.15) and RM3.15/USD for CY 15 (from RM3.1) based on our latest house view.

“Our earnings forecasts for TA Ann are, therefore, raised by 2.5%-4% for FY14-15 while those of WTK will go up 3%-7% for FY14-15 and Jaya Tiasa’s by 4%-10% for FY14-15,” said RHB Research.

It has raised the fair value of Ta Ann to RM5 from RM4.88 and that of WTK to RM1.80 from RM1.76 and Jaya Tiasa to RM2.95 from RM2.80.

Besides logging, all the three companies, headquartered in Sibu, are involved in manufacturing of timber products, mainly plywood, and have in recent years diversified into cultivation of oil palm.

RHB Research said although Myanmar’s log export ban should also have a knock-on effect on plywood supply and prices, it was maintaining its plywood price assumptions for now at an increase of 2%-3% year-on-year (y-o-y) on CY14-15 as demand from Japan remains rather lacklustre

“Concrete panel prices have dipped 5%-6% y-o-y at US$700-US$705 per cu m while floor base prices are still up by about 4%-6%.”

According to the research house, Ta Ann and Jaya Tiasa would benefit from the recent rise in crude palm oil (CPO) prices as their plantation divisions currently contributed between 40% and 50% to group profit.

“Based on our high CPO price assumptions of RM2,700/tonne for 2014 and RM2,900/tonne for 2015, contributions from the plantation divisions of these companies will increase to 50%-80% of pre-tax profit by 2015,” it said.

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