WTK reported a core net loss of RM10.1m in 1H17 mainly due to losses from the oil & gas and plantation divisions. We have cut our 2017-19E EPS forecast by 22-56% to account for the weaker-thanexpected 1H17 results, recent cut in log export quota as well as higher log and plywood costs of production assumptions. After rolling forward our valuation basis to 2018E, our SOTP-derived TP for WTK is now lower at RM0.71 due to our earnings cuts. We downgrade WTK to SELL from HOLD.

Weaker-than-expected 1H17 Results

WTK’s 1H17 revenue increased by 11.1% yoy to RM394m on the back of higher revenue from its timber, plantation and manufacturing divisions, partially offset by lower revenue from its oil & gas and trading divisions. However, WTK reported a core net loss of RM10.1m compared to a core net profit of RM7.5m in 1H16 mainly due to losses from its oil & gas and plantations divisions. The 1H17 core net profit was below our expectation mainly due to higher-than-expected loss coming from the oil & gas division.

2Q17 Core Net Loss of RM11m

Sequentially, WTK’s revenue declined by 22.3% qoq mainly due to lower contribution across all divisions. The revenue from its timber, plantation, oil & gas, manufacturing and trading divisions declined by 19.7%, 2.5%, 98.5%, 14.0% and 0.4% qoq, respectively to RM145.6m, RM8.2m, RM0.2m, RM10.0m and RM7.6m. After excluding forex and other one-off items, WTK reported a core net loss of RM11m in 2Q17 from a core net profit of RM0.7m in 1Q17 mainly due to higher losses from the oil & gas division. The 2Q17 EBITDA margin was weaker at 1.8% vs. 10.7% in 1Q17.

Downgrade to SELL With a Lower Target Price of RM0.71

We have cut our 2017-19E core EPS by 22-56% mainly to account for the recent cut in log export quota to 20% (previously 30%), higher log and plywood costs of production assumptions as well as lower contribution from the oil & gas division. After rolling forward our valuation basis to 2018E, our SOTP-derived TP for WTK is now lower at RM0.71 (from RM0.94) due to our earnings cuts. Given the 13% downside to our new TP, we downgrade the stock to a SELL (from HOLD). WTK is valued based on 8x 2018 EPS for its timber division, and 1x P/BV for its forest plantation and palm oil.

Source: Affin Hwang Research - 30 Aug 2017