- 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 Malaysia hopes to conclude negotiations and sign a voluntary partnership agreement (VPA) with the European Union (EU) by year-end, to ensure the legality of the country’s timber. According to the report, such an agreement between the EU and timber producing countries is aimed at halting illegal logging and associated trade.

- The Plantation Industries and Commodities Ministry’s adviser Datuk Dr Freezailah Che Yeom is cited as saying that one of Malaysia’s initiatives to ensure an uninterrupted flow of wood exports to the EU until the VPA was signed included the Malaysian Legality Assurance System (MYTLAS).

- Acknowledged by the European Forest Institute (EFI), MYTLAS is reportedly a credible domestic system to verify the legality of Malaysian wood products. Starbiz said the EU, a key market for value-added timber and timber products such as furniture, is Asia’s second largest export market for sawnwood and plywood.

- The report also cited EU Ambassador and head of delegation to Malaysia, Luc Vandebon, as saying that Malaysia’s timber and timber product exports to the EU last year totalled RM20.2bil. He said countries that have forest law enforcement, governance and trade VPAs with the EU would be able to export their timber on a fast “greenlane”.

- We believe any conclusion to the potential Malaysia-EU VPA would be positive over the longer term for the timber players, including Jaya Tiasa and Ta Ann, given the unreliable plywood demand from Japan. As of now, plywood constitutes only a minute portion of Jaya Tiasa’s exports (~1%), while the bulk of Ta Ann’s plywood is exported to Japan.

- Any significant recovery in the timber sector 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. Against that backdrop, we maintain our HOLDs for the stocks, due to the heightened risks in both the timber and oil palm sectors.

Source: AmeSecurites