WTK incurred a wider-than-expected core net loss of RM19.3m in 6M19 (vs a core net loss of RM19.5m in 6M18), and the variance was mainly due to weaker-than-expected contributions from the timber and plantation divisions. Given the weak 6M19 results, we now project a 2019 core net loss of RM6.7m, and we cut our 2020-21 core EPS forecasts by 61%. Given our earnings forecast revisions, we lower our SOTP-derived TP to RM0.55 from RM0.65 and downgrade WTK to HOLD from BUY, as we turn more cautious on the stock, especially on its timber division due to price competition from other exporters (for example Indonesia, PNG and Solomon Islands).

6M19 Core Net Loss of RM19.3m, Below Expectations

WTK’s 6M19 revenue declined by 17.4% yoy to RM322.2m, attributable to lower revenue contributions from its timber (attributed to lower sales revenue from the plywood sub-segment) and plantation (attributed to the drop in CPO and PK ASPs) divisions, but partially offset by higher revenue from its manufacturing & trading division (attributed to higher export sales). The timber and plantation division’s revenue declined by 18.4% and 25% yoy, respectively, to RM258m and RM30.3m, while the manufacturing & trading division revenue was higher at RM33.3m, up 1.9% yoy. WTK posted a LBT of RM18.8m vs. a LBT of RM18.5m in 6M18. This was due to higher losses from the plantation division as well as a lower profit contribution from the manufacturing & trading division, but partially mitigated by lower losses from the timber division. After excluding one-off items, WTK recorded a core net loss of RM19.3m in 6M19, narrowing slightly from a core net loss of RM19.5m in 6M18. The 6M19 results were below our expectations, mainly due to weaker-than-expected contributions from the timber and plantation divisions.

Losses Widen Due to Timber and Manufacturing & Trading Divisions

WTK reported a drop in 2Q19 revenue of 20.5% qoq to RM142.7m and the EBITDA margin was lower by 5.2 ppt to 2.3%, mainly due to weaker margins from the timber and manufacturing & trading divisions. WTK’s 2Q19 core net loss also widened to RM15.1m vs. a core net loss of RM4.1 in 1Q19.

Downgrade to HOLD Rating, New TP at RM0.55

Given the weak 6M19 results, we now project a 2019 core net loss of RM6.7m, and we cut our 2020-21 core EPS forecasts by 61%. The cut in earnings is mainly attributable to lower log, plywood and CPO average selling price assumptions. Given the earnings forecast revisions, our SOTPderived TP is now lower at RM0.55, based on an unchanged 8x 2019E PER for its timber division, and 1x P/BV for its forest plantation and palm oil operations. Given the upside of 8.9% to our new TP, we downgrade WTK to a HOLD rating from BUY previously. We are turning more cautious on the stock, especially on its timber division due to price competition from other exporters (for example Indonesia, PNG and the Solomon Islands).

Key Risks

The upside/downside risks to our recommendation would be: 1) higher- /lower-than-expected log and FFB production; 2) a substantial increase/drop in demand for timber and plywood products; 3) a sharp increase/decline in ASPs for log, plywood and CPO; and 4) a strengthening/weakening of US$ against the MYR.

Source: Affin Hwang Research - 28 Aug 2019