Despite  weakness  in  its  timber  operations,  WTK  Holdings’  earnings grew  to  MYR9.7m  (+2.8%  y-o-y)  in  1QFY13.  Its  manufacturing  division, focused  mainly  on  aluminum  and  packaging  products,  mitigated  the decline  in  timber  sales.  We  upgrade  WTK  to  a  BUY,  with  a  FV  of MYR1.45  amid  attractive  valuations.  Its  diversification  into  a  less-cyclical sector will also help offset lower timber earnings. 

-  In line. WTK Holdings (WTKH)’ revenue fell to MYR173.8m (-14.6% y-o-y,  -11.2%  q-o-q)  in  1QFY13  as  the  sales  volume  for  logs  and  plywood fell by 44.5% and 9.8% y-o-y respectively. Core earnings, however, grew to MYR9.7m (+2.8% y-o-y, +0.7% q-o-q) as rising demand for the firm’s foil  products  and  cellulose  tapes  lifted  earnings  at  its  manufacturing segment. The quarter’s earnings represent 20.7% and 19.3% of our and consensus  estimates  respectively.  1Q  profits  have,  on  average, accounted for 19.6% of its full year earnings over the past two years.  

- Non-timber segment steals the show. WTKH was among a handful of timber  players  that  managed  to  raise  prices  in  1QFY13  –  log  and plywood selling prices increased by 1.7% and 3.0% y-o-y respectively at the expense of sharply lower volumes. The firm’s manufacturing division, which  produces  flexible  aluminum  foil  and  packaging  materials  for durable and consumer goods as well as a variety of tapes, was WTK’s key  earnings  driver  and  mitigated  an  earnings  decline  for  the  quarter. Profit  for  the  segment  surged  by  227.5%  y-o-y  amid  stronger  demand, which led to economies of scale and a lower cost per unit.  

- Upgrade to BUY. We are lowering our FY14 earnings forecast by 9.7% after  factoring  in  less  bullish  growth  assumptions  in  timber  volume  and prices. Nevertheless, we are upgrading the stock to a BUY, with a FV of MYR1.45  after  rolling  forward  our  valuation  to  12.0x  FY14  P/E.  Its diversification to consumer-based products should help mitigate softness in the timber market at a time when many of its competitors are suffering from the double blow of weak timber and plantation profits. WTKH is also 
the  cheapest  timber  company  within  our  coverage,  as  its  peers  are trading at 11x-60x FY14 P/E. 

Source: RHB