- We upgrade Jaya Tiasa Holdings to a HOLD (from SELL previously), with a higher fair value of RM2.00/share (vs. RM1.68/share previously) based on a raised PE of 15x (vs. 13x previously) FY14EPS of 13.3 sen.

- The PE valuation of 15x is two notches below the current simple average of Malaysian plantation stocks of ~17x for FY14F, but the implied PE for its oil palm business is much higher at 27x.

- Nonetheless, valuations are strongly backed by the anticipated FFB growth. Its FFB production for FY13F will likely be at 7% below our initial forecast of 726,000 tonnes, at 675,000 tonnes (12% YoY; yield/mature ha: 13.5 tonnes).

- We expect the harvest to rebound by a strong 28% to 866,000 tonnes (yield: 15.7 tonnes) for FY14F and by another 21% to breach 1mil tonnes (yield: 18 tonnes) in FY15F. The average age of its oil palm trees is over 5 years.

- Its oil palm earnings are expected to account for 73% and 74% of its FY14F and FY15F earnings, respectively. Our CPO price assumptions are at RM2,350/tonne for FY13F and at RM2,500/tonne for FY14F and FY15F.

- We have lowered our FY13F earnings by a further 29% to RM32mil from RM44mil previously, and tweaked our FY14F forecast upwards by 3% to RM129mil. It posted a net profit of only RM17.5mil and a core net profit of only RM11mil in 9MFY13, as costs surged 21%, partly due to the implementation of the minimum wage.

- At the same time, we have also tweaked upwards the average export price of its logs by 2% for FY13F to US$214/cu m from US$209/cu m previously. We maintain the average export prices at US$206/cu m and US$202/cu m for FY14F and FY15F, respectively.

- Starbiz on Monday cited a Jaya Tiasa official as saying that tight supply due to declining production has driven Sarawak’s tropical log prices sharply higher this year. Unfavourable weather has played a part, other than increasing scarcity of tree stocks.

- The export price of meranti logs has soared nearly 60% to US$280/cu m from US$180/cu m a year earlier, while the other log species have increased by an average of between US$10 and US$15/cu cu m. Meranti makes up between 30% and 40% of its log production volume.

- Jaya Tiasa’s long-term prospects remain intact and are premised on the strong growth of its oil palm operations backed by:- 1) favourable age profile of oil palm trees, and 2) cost savings from three new mills over the next one to two years.

Source: AmeSecurities