Stock Name: JTIASA
Company Name: JAYA TIASA HOLDINGS BHD
Research House: RHB

Jaya Tiasa Holdings Bhd
(Dec 8, RM4.09)
Maintain outperform at RM4.02 with revised target price of RM4.83 (from RM5.31): Owing to firm log prices and an improvement in log production of 8.6% quarter-on-quarter (q-o-q) in 2QFY2011 ending April, we expect Jaya Tiasa to report better earnings from its log division in its upcoming quarterly results. Going forward, we believe the tight log supply situation in Sarawak is likely to continue for another few months due to seasonal factors before log production starts to normalise.

Average selling prices for Jaya Tiasa's plywood division crept up by 3.1% q-o-q in 1QFY2011, while capacity utilisation rate improved to 60% (from 54% in 4QFY2010). Management agreed that demand volume is not that great but is sufficient for plywood prices to improve gradually. We note that South Korea's contribution to total plywood sales in 1QFY2011 has declined to a mere 6% (from 22% in 4QFY2010) due to the preliminary anti-dumping duties imposed on Malaysian plywood products by South Korea since early July.

Jaya Tiasa has revised downwards its fresh fruit bunch (FFB) production targets for future years, a result of lower assumptions of mature areas and average yield per hectare. We believe management is erring on the conservative side, as the revised FFB production forecast for FY2011 appears easily achieved based on current production levels and even after taking into account the potentially lower output in 2HFY2011 due to seasonal factors.

Risks include: i) timber and CPO prices falling; ii) a slower than expected recovery in the global economy; and iii) significant increase in crude oil-related glue and logistics costs.

We cut our FY2011/13 net profit by 6.1% to 9.7%, after adjusting for; i) lower FFB and CPO production projections; ii) a declining trend in cost of production per tonne; iii) higher interest expense going forward; and iv) lower depreciation expense.

We reduce our target price for Jaya Tiasa to RM4.83 (from RM5.31 previously) based on unchanged target PER of 12 times CY2011 earnings for the timber division and 13 times CY2011 earnings for the plantation division. Despite the cut in our target price, we maintain our outperform recommendation on Jaya Tiasa given the decent 20% potential upside as well as the significant upcoming change in its earnings profile, which will see the plantation division contributing about 70% to 75% of earnings from FY2011 onwards (from about 40% previously). ' RHB Research Institute Sdn Bhd, Dec 8


This article appeared in The Edge Financial Daily, December 9, 2010.