WTK incurred a smaller-than-expected core net loss of RM15.3m in 9M18, narrowing from a core net loss of RM26.1m in 9M17. This was above our expectation, mainly attributable to better-than-expected contribution from the timber division. As such, we narrow our 2018 core net loss forecast to RM13m (from RM32m previously). No changes were made to our 2019-20 core EPS forecasts as we think that earnings will continue to improve going forward with higher contribution from the timber division and narrowing losses from the plantation division. Given the share-price correction and now 12% upside to our TP, we upgrade WTK to a BUY from SELL.

9M18 Results Above Expectation

WTK’s 9M18 revenue increased by 6.2% yoy to RM603.2m, mainly due to higher contribution from its timber (attributable to an increase in log sales volume) and plantation (attributable to higher CPO sales volume) divisions, but partially offset by lower contribution from its manufacturing and trading divisions (attributable to lower export sales due to weakening demand for masking tapes). Revenue of the timber and plantation divisions increased by 1.9% and 81.7% yoy, respectively, to RM487.1m and RM62.6m, while revenue of the manufacturing and trading divisions were down by 0.7% and 5.3% yoy, respectively, to RM30.5m and RM21.6m. WTK’s 9M18 PBT surged >100% yoy to RM73.1m, mainly due to the gain on deconsolidation of its subsidiary. After excluding one-off items, WTK recorded a core net loss of RM15.3m in 9M18, narrowing from a core net loss of RM26.1m in 9M17 and above our earlier expectation for a RM32m core net loss in 2018. The variance to our forecast was partly attributable to better-then-expected contribution from its timber division.

Improved Sequentially

WTK reported stronger 3Q18 revenue of RM213.2m, up 3.1% qoq, attributable to higher revenue contribution from its timber and plantation divisions. EBITDA margin improved to 8.6% in 3Q18 mainly due to margin improvement in the timber division. WTK’s core net profit more than doubled qoq to RM2.9m.

TP Unchanged at RM0.53, Upgrade to BUY

Given the stronger 9M18 results, we narrow our 2018E core net loss to RM13m (from RM32m previously). No changes were made to our 2019-20 core EPS forecasts as we think that earnings will continue to improve going forward with higher contribution from the timber division and narrowing losses from the plantation division. On valuation grounds, we upgrade WTK to a BUY (previously a SELL). Our SOTP-derived TP of RM0.53 is based on a 8x 2019E PER for its timber division, and a 1x P/BV for its forest plantation and palm oil division.

Key Risks

The downside risks to our recommendation would be: 1) lower-than-expected log production; 2) a substantial drop in demand for timber and plywood products; 3) a sharp decline in ASP for log and plywood; and 4) weakening of the US$.

Source: Affin Hwang Research - 3 Dec 2018