WTK incurred a core net loss of RM4.1m in 1Q19, narrowing from a core net loss of RM20.1m in 1Q18. This was below our expectation mainly due to the plantation division, given the weak CPO prices. As such, we cut our 2019-21 core EPS forecasts by 6-9% to account for lower CPO price assumptions. We still expect better quarters ahead for WTK with improvement in earnings from the timber (steady demand for timber products and higher ASPs) and plantation (higher production and lower CPO production costs) divisions. Based on our revised earnings forecasts and after rolling forward our valuation horizon to 2020E, we revise our TP for WTK to RM0.65. Maintain BUY.

Weaker Earnings Due to Plantation Division

WTK’s 1Q19 revenue declined by 1.2% yoy to RM179.4m, mainly due to lower revenue contribution from its timber (-2.2%) and plantation (-8%) divisions that was partially offset by higher revenue from its manufacturing and trading (+16.2%) division. The group reported a LBT of RM3m in 1Q19, narrowing from a LBT of RM20.6m in 1Q18. This was due to higher profit contribution from the timber (due to higher timber product prices) and manufacturing and trading (due to increase in export sales of masking tapes) divisions, but this was partially offset by wider losses in the plantation division due to the weak CPO prices. After excluding one-off items, WTK recorded a core net loss of RM4.1m vs. a core net loss of RM20.1m in 1Q18. This was below our expectation mainly attributable to the wider-than-expected losses from the plantation division.

Maintain BUY With a New Target Price of RM0.65

Given the weaker-than-expected 1Q19 results, we cut our 2019-21 core EPS forecasts by 6-9% mainly to take into account lower CPO price assumptions of RM2,200-2,500/MT for 2019-21 (from RM2,400-2,550/MT previously). We still expect better quarters ahead for WTK with improvement in earnings from the timber (on steady demand for timber products and higher ASPs) and plantation (on better prices, higher production and lower CPO production costs) divisions. Despite the earnings forecast revisions, our SOTP-derived 12-month TP for WTK is raised to RM0.65 as we roll forward our valuation to 2020E with an unchanged target PER of 8x for its timber division, and 1x P/BV for its forest plantation and palm oil plantation divisions. We maintain our BUY call on the stock.

Source: Affin Hwang Research - 31 May 2019