WTK incurred a core net loss of RM19.4m in 1Q18 mainly due to losses from the timber and plantation divisions. The shortage of quality logs coupled with the increased in costs of production were the main factors for the loss making timber division. We have cut our 2019-20E core EPS forecasts by 38-50%, while projecting a RM30.8m core net loss for 2018, to account for the weak 1Q18 results. Our SOTP-derived TP for WTK is now lowered to RM0.55. Maintain SELL.

1Q18 Results Below Expectation

WTK’s 1Q18 revenue declined by 12.5% yoy to RM183.2m mainly due to lower revenue from its timber, manufacturing and divisions, but partially offset by higher revenue from its plantation division. The timber, manufacturing and trading divisions revenue were down by 17.4%, 22.4% and 10.8% yoy, respectively, to RM149.7m, RM9.1m and RM6.7m. Meanwhile, the plantation division’s revenue more than doubled yoy to RM17.2m. 1Q18 PBT surged >100% yoy to RM64.3m, largely due to the gain on deconsolidation of its subsidiary totalling to RM85m. The timber and plantation division recorded a LBT of RM13.7m (1Q17 PBT: RM9.7m) and RM7.6m (1Q17 LBT: RM4.9m), respectively. After excluding one-off items, WTK recorded a core net loss of RM19.4m vs. a core net loss of RM2.7m in 1Q17. The weak results came in below our expectation and the variance was largely due to the loss making timber division. Despite the increase in log volume by 50.9% yoy to 194,849m3, WTK’s revenue from sale of logs declined in 1Q18 as shortages of quality logs has caused a significant pull back of export sales. The shortage of quality logs as well as the increased in costs of production due to the hike in hill timber premium rate, effective July 2017, were the main factors for the loss making timber division.

Maintain SELL With a Lower Target Price of RM0.55

We have cut our 2019-20E core EPS forecasts by 38-50%, while projecting a RM30.8m core net loss for 2018, to account for the weak 1Q18 results. Due to our earnings cut, our SOTP-derived TP for WTK is now lower at RM0.55 (from RM0.57), based on 8x 2019 EPS for its timber division, and 1x P/BV for its forest plantation and palm oil. We maintain our SELL rating on WTK.

Source: Affin Hwang Research - 28 May 2018