Weak 9M16 results was below expectations

WTK’s 9M16 core net profit of RM3.8m (-90% yoy) was below our and consensus expectations. We have cut our 2016E EPS forecast by 41% to account for the weaker 9M16 results but 2017-2018E by modest 2- 3% only. Our SOTP-derived target price is now at RM1.23. Maintain BUY, as we continue to like WTK for its future plantation earnings prospects.

Weaker-than-expected 9M16 results

WTK’s 9M16 core net profit declined by 90.1% yoy to RM3.8m, despite revenue increasing by 6.4% yoy to RM513.4m. The 9M16 core net profit was below expectations, accounting for only 11% of both our previous and consensus 2016 forecasts, respectively. The variance to our forecasts was mainly due to lower-than-expected earnings contribution from the timber, plantation and manufacturing divisions.

3Q16 core net loss of RM4m

WTK’s 3Q16 revenue declined by 11.6% yoy to RM158.8m. This was mainly attributable to lower contribution from the timber, manufacturing and trading divisions but partially offset by higher contribution from the plantation and oil & gas business. EBITDA margin was also weaker at 14.3%, dropped 5.5ppt from 19.8% in 3Q15, mainly due to lower margins from timber and manufacturing and trading divisions. As such, 3Q16 recorded core net loss of RM4.0m compared to 3Q15 (core net profit of RM20.1m). No dividend was declared in the quarter as expected.

Cutting 2016-18E core EPS forecasts

Given the weaker-than-expected 9M16 performance, we are cutting our 2016-18E core EPS estimates by 3-41%, mainly adjusting for lower plywood sales volume, lower plywood ASP, lower contribution from manufacturing division but partly offset by weaker Ringgit assumption to RM4.10-4.20/US$ from RM3.90-3.95/US$.

Maintain BUY but with a lower target price of RM1.23

Our SOTP-derived 12-month target price for WTK has now been lowered to RM1.23 (from RM1.25). WTK is valued based on 10x 2017E EPS for its timber division, and 1x P/BV for its forest plantation and palm oil. Maintain our BUY recommendation on WTK, as we continue to like WTK for its future plantation earnings prospects with the first palm oil mill likely to be completed in 2017

Source: Affin Hwang Research - 23 Nov 2016