Given  our  recent  timber  sector  upgrade,  we  have  upgraded  our forecasts and FV for WTK. The company is the purest timber play within our  coverage,  as  its  plantations  division  is  not  expected  to  contribute significantly  to  profits  until  FY16  onwards.  As  such,  any  improvement in timber prices will have a bigger impact on WTK’s  earnings.  The company is our top pick for the sector.   

- Timber sector upgraded to OVERWEIGHT.  In our recent report dated 2  Aug,  we  upgraded  the  timber  sector  to  an  OVERWEIGHT  (from Neutral). We are now more positive on the sector’s prospects,  given  a strong recovery in log prices and Japan’s improving economic activity, which translates to rising plywood imports. Although plywood prices have not  enjoyed  a  similar  re-rating  like  logs  as  yet,  we  believe  this  is  on  its way, given the general 4-6 months lag to pass on higher log costs. 

- Log  prices  already  up  20-30%  y-o-y,  plywood  prices  should  re-rate soon. Malaysian tropical log prices have been rising steadily since April, due  to  a  log  shortage  in  the  global  market.  Currently,  Malaysian  log prices are about USD250-270 per cu m, up 20-30% y-o-y. We expect log prices to hold at current levels for the rest of the year and for 2014. This means  that  average  log  prices  will  be  about  USD230-250  per  cu  m  in CY13, rising by 8-9% to USD250-270 per cu m in CY14. As for plywood prices, although this has not moved as significantly yet (only up 3-5% y-o-y  and  q-o-q),  we  believe  this  is  on  the  way,  given  the  general  4-6 month  lag  to  pass  on  higher  log  costs.  We  are  projecting  average plywood prices to rise by 3-5% in CY13, and by a further 4-6% in CY14.

- Upgrading forecasts and fair value. We upped our forecasts for WTK by  18-22%  for  FY13-14.  Besides  raising  our  log  and  plywood  price assumptions,  we  also  imputed  a  weaker  USD/MYR  exchange  rate  for CY13 of MYR3.10 per USD (from MYR3.00 per USD), while leaving our CY14  assumption  of  MYR3.00  per  USD  unchanged,  which  would  bode well  for  exporters  like  WTK.  Post-earnings  revision,  our  FV  (based  on 12x  CY14F  EPS)  was  raised  to  MYR1.80  (from  MYR1.45). WTK  is  our top  sector  pick.  This  is  because  it  is  the  purest  timber  play  within  our coverage,  as  its  plantations  division  is  not  expected  to  contribute significantly to profits until FY16 onwards. As such, any improvement in timber prices will have a bigger impact on earnings. Maintain BUY. 

Source: RHB