RHB Research keeps buy recommendation on Jaya Tiasa, Ta Ann and WTK

KUCHING: A local research house is upbeat on the outlook of the timber sector going forward, maintaining its “Buy” recommendation on three Sibu-based companies.

Keeping its “Overweight” stance on the sector in view of positive developments, RHB Research Institute has, however, switched its top pick from Jaya Tiasa Holdings Bhd to Ta Ann Holdings Bhd, which are also both involved in oil palm plantation business.

It too has maintained a “Buy” call on WTK Holdings Bhd.

The research house said export ban on logs imposed by Myanmar in April this year had impacted prices of certain Malaysian log species.

“The keruing species (the closest substitute to Myanmar logs) has seen a 30% increase in prices — from US$270 per cu m at end-2013, to US$350 per cu m currently — due to India’s strong demand.

“We expect the impact on prices of other Malaysian log species to be felt from August onwards once India’s inventory is depleted,” it added in a recent report. For the record, India is Sarawak’s key buyer, absorbing about 60% of the state’s total export of logs.

Prior to the ban, India — the largest importer of Myanmar’s tropical logs — was reported to have stocked up, keeping the country with enough inventory to last till end of this month.

According to RHB Research, most timber companies view that India’s opposition party — which was recently elected as the new government — is expected to be more pro-business.

It said as the current dry weather in Sarawak might last through September, this meant that log transportation via barges could get more difficult.

As such, the research house said, producers might have to harvest fewer logs, resorting to transporting the commodity via land — which is costlier by about US$20 per cu m — or find other rivers less affected by the dry weather, which might require new infrastructure to be built.

“Should the El Nino phenomenon occur, it may lead to a more severe supply shortfall and subsequently, impact log prices. Hence, we believe our forecaste price increases of 6%-8% per annum for 2014 and 2015 are achieveable,” RHB Reasearch added.

It also said the potential onset of El Nino in the current quarter could also prove a boon to Ta Ann and Jaya Tiasa as their plantation divisions currently contributed between 30% and 50% to total profits.

“Although palm oil prices have softened of late, we expect prices to strengthen hereon, driven by the dry southwest monsoon that started in mid-May and has already caused an increase in hotspots in Sumatra and Peninsular Malaysia from mid-June.

“Taking into account our rising crude palm oil (CPO) pricer assumptions of RM2,700 per tonne for 2014 and RM2,900 per tonne for 2015, as well as their improve age profiles, the plantation units of these companies could contribute 50%-70% of total profits by 2015.”

RHB Research said while it kept its “Buy” call on Jaya Tiasa (fair value RM2.95), Ta Ann (FV RM5.40) and WTK (FV RM1.80), it had switched its top pick from Jaya Tiasa to Ta Ann.

“Ta Ann offers the biggest upside currently as valuation are still relatively inexpensive while earning growth is at an impressive three-year CAGR (compound annual growth rate) of 34%, coming from increasing maturity of its plantation landbank,” it added.

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