- We are OVERWEIGHT on the timber sector, with BUYS for both Jaya Tiasa Holdings (FV: RM2.40/share) and Ta Ann Holdings (FV: RM4.55/share) amid the clampdown on illegal logging in Sarawak.

- While data is hard to come by, anecdotal information – from our conversations with unlisted local mill operators –suggests that supply may have gone down by as much as 20%-30%.

- We took a small group of clients to Kuching last week, and met up with Jaya Tiasa and Ta Ann representatives. They welcome the enforcement activities to curb illegal logging. While they were unable to quantify the impact, they did affirm that the crackdown has led to a significant reduction on supply. The only question we would ask if it could be sustained for the longer term.

- Nonetheless, their comments suggest a common thread that stems from the crackdown – a limited supply of logs going forward that will be able to sustain average log prices at the USD240-USD250/cu m price level, at least for next year.

- Word on the ground has it that it may even go beyond USD250/cu m by the middle of next year, amid India’s vociferous demand for wood for housing and construction materials.

- While both Jaya Tiasa and Ta Ann are optimistic about logs, the same cannot be said of their assessment of the plywood market. The anticipated surge in plywood demand ahead of the 2020 Tokyo Olympics has yet to materialise. The companies foresee lacklustre prices to continue at slightly over US$500/cu m for 2015.

- Jaya Tiasa’s plywood manufacturing will continue to be profitable with prices at above US$500/cu m, but for Ta Ann, the breakeven point is much higher at above US$550 cu m due to its Tasmanian operations. Ta Ann’s Tasmanian prospects now depend significantly on its new markets in Australia.

- On the other hand, Ta Ann’s log ASPs are much better as it exports the bulk of its logs, while Jaya Tiasa’s log ASPs are dragged down by local sales of lower quality wood (which can comprise between 20%-40% of total sales).

- Jaya Tiasa’s exports are limited by the state’s quota that limits export to between 40%-45% of total log production.

- Along with logs, Jaya Tiasa’s and Ta Ann’s prospects are also tied in with the outlook for CPO. In this, we like Jaya Tiasa’s high growth potential over the next two years along with steadily rising FFB yield and OER, as more trees reach prime mature age.

- Both stocks will benefit from any upward trend in CPO prices. We estimate that Jaya Tiasa’s steady-state FFB output could reach 1.5mil tonnes per annum vs. Ta Ann’s 1.1mil tonnes per annum based on their current respective plantable hectarage.

Source: AmeSecurities