Losses Still in Timber and Palm Oil Divisions

WTK incurred a core net loss of RM18.2m in 1H18 mainly due to losses from the timber and plantation divisions. The cost of production remained high at both the timber and palm oil divisions, contributing to the losses. We make no changes to our 2018-20E earnings forecasts. Maintain SELL call on WTK with an unchanged SOTP-derived TP of RM0.53.

1H18 Results Within Expectation

WTK’s 1H18 revenue increased by 2.2% yoy to RM390m, mainly due to higher revenue contribution from its plantation division, but partially offset by lower revenue from its timber, manufacturing and trading divisions. The plantation division’s revenue more than doubled yoy to RM40.4m, while the timber, manufacturing and trading divisions revenue were down by 3.3%, 13.8% and 8% yoy, respectively, to RM316.1m, RM18.7m and RM13.9m. WTK’s 1H18 PBT surged >100% yoy to RM66.5m, largely due to the gain on deconsolidation of its subsidiary totalling to RM120m. The timber and plantation division recorded a LBT of RM5.8m (1H17 PBT: RM14.2m) and RM14.1m (1H17 LBT: RM10.1m), respectively. After excluding one-off items, WTK recorded a core net loss of RM18.2m vs. a core net loss of RM15.6m in 1H17. We deem the results to be within our expectation for a RM32m core net loss in 2018E.

Better Sequentially

WTK reported a stronger 2Q18 revenue by 12.9% qoq to RM206.8m. This was attributable to higher revenue contribution from its timber (higher sales volume of logs and plywood) and plantation (higher sales volume of palm oil products). EBITDA margin improved to 7.8% in 2Q18 mainly due to improvement in margin from the timber division. WTK reported core net profit of RM1.2m vs. a core net loss of RM19.4m in 1Q18.

Maintain SELL With An Unchanged Target Price of RM0.53

We made no changes to our 2018-20E core EPS forecasts post the 1H18 results. For WTK, we think the high cost of production is affecting the timber division and plantation division is hit with lower CPO prices but partially mitigated with the expected increase in FFB production. Meanwhile, the manufacturing and trading continues to face stiff competition from exports markets, soft domestic market, increased substitute products and increased cost of production resulting from higher raw materials. We maintain our SELL rating on the stock with an unchanged SOTP-derived TP of RM0.53, based on 8x 2019E PER for its timber division, and 1x P/BV for its forest plantation and palm oil.

Key Risks

The upside risks to our recommendation would be: 1) higher-than-expected log production; 2) a substantial rise in demand for timber and plywood products; 3) a sharp increase in ASP for log and plywood; and 4) strengthening of US$.

Source: Affin Hwang Research - 3 Sept 2018