- We reiterate our underweight stance on the timber sector, with HOLDs on Ta Ann Holdings (FV: RM3.40/share) based on a PE of 13x FY13F ESP of 26 sen and Jaya Tiasa Holdings (FV: RM1.68/share) based on a 13x PE on FY14F EPS of 13 sen.

- Starbiz today reported that Japan is increasing its import of plywood from Sarawak as reconstruction activities have picked up momentum in coastal towns badly damaged by the earthquake and tsunami two years ago.

- The report cited Shin Yang group executive director, plywood division, Wong Kai Song, as saying that Japan’s higher new housing starts this year was also spurring demand for imported panel products.

- He also said the average plywood price for the Japanese market had gone up by about 15% to US$550/cu m in the first quarter of the year vs. last year’s, thanks to stronger demand.

- He said there was another 5% to 10% upside potential in the price, expecting the growth in export volume to Japan to be sustained this year.

- According to the Sarawak Timber Association, Japan’s plywood import from Sarawak rose by over 10% to over 1.44mil cu m last year from 1.31mil cu min 2011. This spells good news for Ta Ann as over 90% of its plywood products are exported to Japan.

- With the improving prices, Ta Ann might be able to minimise its losses stemming from the Tasmania veneer manufacturing operations.

- Nonetheless, the company would still continue to be hampered by its operational issues at the Tasmania facilities, including high operating costs. Jaya Tiasa’s plywood exports are more spread out, with exports to markets such as the US (where housing starts are also picking up), India, South Korea, and Taiwan. We understand that log prices have held up and are staying above US$200/cu m.

- Any significant recovery in the timber is still in doubt in the near term and medium term. We remain optimistic about Jaya Tiasa’s and Ta Ann’s oil palm plantation operations over the longer term. Against that backdrop, we maintain our HOLDs for the stocks, due to the heightened risks in both the timber and oil palm sectors.

Source: AmeSecurities