We expect Jaya Tiasa’s earnings to turn around in FY20, mainly driven by its palm-oil plantation division. This would be largely underpinned by higher CPO production and a recovery in CPO prices. We have increased our FY20-22 core EPS forecasts by 1-46%, mainly to take into account likely higher contribution from the plantation division that is partially offset by a lower timber contribution. In tandem with our earnings upgrade, our 12-month SOTP-derived TP for Jaya Tiasa is raised to RM1.55; maintain Buy.

Plantation earnings likely to improve as production and prices rise

We forecast Jaya Tiasa’s earnings going forward to be mainly derived from the palm-oil division. We expect FY20-22E earnings for Jaya Tiasa’s palm-oil plantation division to be driven by rising CPO production (as more plantation areas reach prime age and higher OER) and better selling prices. We expect CPO prices to be higher in FY20E mainly because of stronger demand growth for palm-oil products (especially from food and energy industries) as compared to the production growth rate. For Jaya Tiasa, we forecast the CPO ASPs to be RM2,350-2,600/MT for FY20-22E.

Rocky road for timber division

Demand for tropical hardwood logs and plywood softened in 2019, mainly due to stiff price competition. We forecast Jaya Tiasa’s log and plywood ASPs to be RM690-760/m3 (FY19: RM717/m3 ) and RM2,050-2,240/m3 , respectively for FY20-22 (FY19: RM2,332/m3 ). We think log and plywood prices should improve over time given the prolonged supply shortfall as a result of declining yearly production due to diminishing natural resources. We assume plywood production costs for FY20-22E to be higher at RM2,500-2,600/m3 from RM2,000-RM2,100/m3 previously, mainly due to lower plywood production volumes. Our log production cost assumptions for FY20-22E are kept at RM460-475/m3 .

Maintain BUY rating with a new TP of RM1.55

We raised our FY20-22 core EPS forecasts by 1-46%, mainly to take into account higher contribution from the plantation division that is partially offset by weaker contribution from the timber division. Our SOTP-derived TP for Jaya Tiasa is raised to RM1.55, based on unchanged targets of 8x FY21E PER for the timber division, 21x FY21E PER for the plantation division and 1x PBR for the forest plantation. Maintain BUY.

Source: Affin Hwang Research - 7 Jan 2020