WTK’s 1H13 net profit fell  below  expectations,  as  the  improvement  in log prices only began taking effect in the later part of 2Q13.  Prospects for the timber sector continue to look promising with strong log prices and  rising  plywood  volumes.  Should  plywood  volumes  maintain  at current  levels  for  the  next  few  months,  it  could  likely  implement  more significant selling price increases by 4Q13. Maintain BUY.  
 
- Below  expectations.  WTK  Holdings  (WTK)’  core  net  profit  was  below expectations,  coming  in  at  35-37%  of  our  and  consensus  FY13 forecasts.  The  main  variance  came  from  the  lower-than-expected average export log prices, which rose 10-20% y-o-y (vs our projected 25-35%  for  FY13).  Although  log  prices  have  been  rising  since  1Q13  (with YTD prices up 20-30% y-o-y in Aug), the company may not be able to hit our projected price assumption for FY13, given the lower prices achieved in 1H13. As such, we are reducing our log price projections for FY13-14, to reflect a 20-25% price increase instead.  

- Core net profit rose 18% while revenue fell 4% on a  yearly basis in 1HFY13, as the plywood sales volume rose 10.4%, while log production was  relatively  flat.  Selling  prices,  however,  continued  recovering  in 2Q13,  with  log  prices  climbing  10.7%  y-o-y  while  plywood  prices  rose 4.4% y-o-y.  

- Positive prospects. Going forward,  Management continues to see firm export log prices and improving plywood sales volumes. Should plywood sales  volumes  continue  at  the  current  levels  for  the  next  few  months, WTK  could  likely  look  to  implement  more  significant  selling  price increases for its plywood products by 4Q13.  

- Maintain BUY. We are lowering our FY13F and FY14F earnings by 13% and  18%  respectively,  after  factoring  in  lower  selling  prices  of  export logs.  Nevertheless,  we  maintain  our  BUY  call  on  the  stock,  with  a lowered FV of MYR1.60 (from MYR1.80) based on 12x CY14 EPS. WTK 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.  WTK  is  also  the  cheapest  timber  company  within  our coverage, as its peers are trading at 12-14x FY14 P/E.

Source: RHB