We  continue  to  like  Jaya  Tiasa  despite  its  somewhat  disappointing 3QFY14  results.  With  improving  FFB  production  as  well  as  higher  log and  plywood  prices,  we  expect  the  company  to  be  on  track  to  deliver >100%  earnings  growth  in  FY14  and  FY15,  albeit  coming  from  a  low base. We maintain our BUY call on the stock, with a slightly lower SOP-based FV of MYR2.95 (from MYR3.06). 
 
Key highlights from our recent visit: i)  Log production is weaker due to dry weather, but this is improving, ii) log prices are rising due to tight log supply, iii) plywood volume is lower, but prices are holding up well, iv) FFB  (fresh  fruit  bunches)  growth  is  strong,  but  below  its targets,  v)  the profitability  of  its  plantation  division  should  improve  going  forward,  and vi) capex is mainly allocated for its plantation division.  

Log  prices  are  on  the  way  up,  having  risen  18.7%  y-o-y in  9MFY14. This was mainly due to the tighter log supply caused by the dry weather, but  not  yet  from  the  impact  of  Myanmar’s  ban  on  log  exports. Management  expects  the  ban  to  make  a  more  significant  impact  only after  July,  once  India’s  log  inventory  depletes.  We  concur  with management,  and  this  is  reflected  in  our  log  price  projections  of USD210/cubic metre (cu m) for FY14 and USD260/cu m for FY15.  

Profitability  of  plantation  division  should  improve,  going  forward. Jaya Tiasa’s plantation division was affected by weaker-than-expected FFB production in 3QFY14, as well as the sale of some off-specification CPO  inventory  at  lower  prices.  This  should  improve  going  forward  as FFB  production  has  picked  up  and  all  off-specification  inventory  has been  sold.  FFB  production  is  set  to  grow  by  >20%  y-o-y  in  FY14  and FY15.  

Maintain  BUY. We  trim our  forecasts  by  11.6% for  FY14  and  3.7%  for FY15  to  account  for  assumptions  of  higher  unit  cost  at  the  plantation division  and  higher  capital  expenditure  (capex)  for  FY14.  Our  SOP-based  FV,  therefore,  is  lowered  to  MYR2.95  (from  MYR3.06).  We believe  the  company’s plantation division could  continue  to be  its main growth driver in the medium term, as higher CPO prices and strong FFB production growth may boost earnings contributions from this division to close to 50% in FY16 (from 6-7% in FY13).

Key  highlights  from  our  recent  visit:  i)  Log  production  is  weaker  due  to  dry weather, but this is improving, ii) log prices are rising due to tight supply, iii) plywood volume is lower, but prices are holding up well, iv) FFB growth is strong, but below the company’s targets,  v)  the  profitability  of  the  plantation  division  should  improve going forward, and vi) capex is mainly allocated for its plantation division. 

Log  production  weakens  on  dry  weather  but  is  improving.  In  9MFY14,  Jaya Tiasa  produced  754,755  cu  m  of  logs  (-8.9%  y-o-y).  This  was  attributed  to  the extremely  dry  weather  conditions  in  3QFY14,  which  led  to  log  production  falling 17.1% y-o-y. According to management, the water levels at the nearby Rajang river were low during that period, making the transportation of logs difficult. As a result of the  delay  in  transportation,  the  quality  of  the  logs  was  compromised,  and  selling prices had to be discounted slightly. This led to log margins being reduced to 17% in 3QFY14 (from 25% in 2QFY14).  Although the weather has improved since then, as can  be  seen  by  the  recovery  in  log  production  (up  to  11MFY14)  to  -4.6%  y-o-y, management has acknowledged the need to address this issue should the weather cause  problems  again.  It  highlighted  two  options  going  forward:  i)  transporting  the logs to a particular point where the water level is higher on the Rajang river, although this  would  increase  transportation  costs  by  about  USD20/cu  m,  or  ii)  transport  the logs  to  a  different  river  (ie  Tubau  river),  which  would  require  some  one-off infrastructure costs. Management is studying its options currently.   We estimate  log production to decline by 8.8% y-o-y in FY14 and grow by 2-3% y-o-y in FY15.

Rising log  prices. Jaya  Tiasa  recorded  an  average  log price  of  MYR667/cu m (or about  USD208/cu  m)  in  3QFY14,  bringing  its  9MFY14  average  log  price  to c.MYR640/cu m (or USD200). This implies an increase of 18.7% y-o-y, or 9.5% q-o-q. Management attributed the rise in prices mainly to the tighter log supply, but not as yet to the impact of Myanmar’s ban on log exports. It expects the ban to impact more significantly only after this month, once India’s log inventory depletes. We are of the same view, and this is reflected in our log price projections of USD210/cu m for FY14 and USD260/cu m for FY15.

Plywood volume declines. Due to the weaker log production, Jaya Tiasa’s plywood production  was  also  lower  by  about  20%  y-o-y  in  3QFY14,  bringing  its  9MFY14 production c. 16% lower y-o-y. Going forward, while management sees some growth in demand from South Korea (which makes up 30% of its sales volume) and Taiwan (32%),  this  may  be  offset  by  slowing  growth  from  China  (11%)  and  the  US  (8%), while demand from Japan, which accounts for  16% of sale volume,  is seeing some small  signs of life.  However,  we  believe  that  demand from  South  Korea  could  slow down going forward, as the country has decided to reintroduce anti-dumping duties of 3.08-38.1%  on  Malaysian  plywood  for  the  next  three  years.  The  previous  anti-dumping duty expired at end-Jan 2014. With this decision, anti-dumping duties could be  re-imposed  as  early  as  end-July.  When  the  duty  was  first  implemented  in  Feb 
2011, Jaya Tiasa’s plywood was taxed at 6.43%, and its exports to South Korea fell to as low as 5% of plywood sales from 43% in the previous quarter. This picked up to 10-20%  in  the  subsequent  quarters.  We  highlight  that  Jaya  Tiasa  managed  to increase its plywood volumes to other markets like Taiwan, the Middle East and  the US to offset the lower volume to  South  Korea when the  anti-dumping duty was still effective.  

…but  prices  are  holding  up  well.  Given  this  scenario,  plywood  volumes  are expected  to  remain  relatively  subdued  for  the  rest  of  the  year,  in  line  with  our projected  15%  decline  for  FY14.  However,  its  average  plywood  price  in  9MFY14 stood at MYR1,876/cu m (or USD586/cu m), which was an increase of 7.5% y-o-y. Management expects plywood prices to remain at these levels for the rest of FY14. Despite this, we maintain our price projections of USD550-560/cu m for FY14-15, to be conservative.   

FFB growth  was strong, but below targets. Jaya Tiasa’s plantation unit recorded FFB production growth of +20.6% in 9MFY14. Based on the current rate of growth, it would not be able to meet its original FFB production projection of 866.6k tonnes (or +30%  y-o-y  growth),  attributed  again  to  the  extreme  weather  in  3Q14  as  well  as some manuring issues experienced in certain areas – although this has since been resolved. Management has lowered its projection to c.780k tonnes for the year, which is relatively close to our  803k-tonne estimate for FY14 (+21% y-o-y). For FY15, we are  projecting  FFB  growth  of  24.7%  y-o-y, which is in line with management’s guidance for 20-25%.    

Profitability of plantation division should improve going forward. On a quarterly basis,  Jaya  Tiasa’s  plantation  division  recorded  an  81.8%  q-o-q  decline  in  PBT  in 3QFY14. This was attributed to the 29% q-o-q fall in FFB production, which resulted in  higher  unit  costs  of  production  (up  an  estimated  32%  in  3Q14).  In  addition,  the company  sold  some  off-specification  CPO  inventory  during  the  quarter (approximately  15%  of  sales  volume  was  off-specification,  ie  oil  with  high free  fatty acid (FFA) content), which brought down its overall CPO selling price. This is evident from Jaya Tiasa’s average selling price in 3QFY14, which was MYR2,364/tonne, or 10.5% lower than the average Sarawak  Malaysian Palm Oil Board (MPOB) price  of MYR2,644/tonne  during  the  same  period.  As  all  of the company’s off-specification inventory  has  been  sold,  we  expect  Jaya  Tiasa  to  achieve  average  CPO  selling prices  closer  to  the  MPOB  average  going  forward,  as  it  does  not  do  any  forward sales. This should improve  its profitability going forward. We have adjusted our unit cost assumptions slightly higher for FY14 to include a 15% y-o-y rise (from 10%), but leave our cost assumptions for FY15 unchanged.  

Capex  mainly  for  plantation  division.  Jaya  Tiasa  expects  to  spend  MYR200m-250m in  capex  in  FY14,  the  bulk  (90%)  of  which is  expected  to  be  invested  in  the plantations  division  for  new  planting  and  new  mills.  As  this  is  higher  than  our projected MYR170m-180m for FY14-15, we have adjusted our forecasts accordingly. It is planting up 3,500 ha of new land in FY14, followed by a remaining 1,340 ha in FY15.  Meanwhile, the company’s second  mill  (capacity  of  60  tonnes/hour)  was completed in Sept 2013, and a third mill (capacity 120 tonnes/hour) is expected to be up and running by August.

Risks 
Main risks. These include: i) a reversal in Japan’s economic recovery, resulting in a decline  in  the country’s housing  starts,  ii)  log  production  recovering  in  a  significant manner  from  Malaysia,  or  if  Indonesia  lifts  its  ban  on  log  exports,  iii)  a  significant change  in  direction  of  the  MYR/USD  exchange  rate,  iv)  the  imposition  of  import 
duties  on  large  export  markets  like  India  and  Japan,  and  v)  a  change  in supply/demand dynamics leading to a sharp fall in CPO prices. 
 
Forecasts 
Trimming forecasts. We tweak our forecasts lower, by 11.6% for FY14 and by 3.7% for FY15, to account for assumptions of higher unit cost for the plantation division and higher capex for FY14.  
 
Valuation and recommendation 
Maintain  BUY.  We  maintain  our  BUY  recommendation  on  the  stock,  with  a  lower SOP-based  FV  of  MYR2.95  (from  MYR3.06). We believe the company’s plantation division will continue to be its main growth driver in the medium term as higher CPO prices and strong FFB production growth could boost earnings contribution from this division to close to 50% in FY16 (from 6-7% in FY13).

Financial Exhibits

SWOT Analysis

Company Profile

Jaya  Tiasa  is  involved  in  the  manufacturing  and  distribution  of  plywood,  logs  and  other  timber  products.  It  is  also  involved  in  the cultivation of oil palms.

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Source: RHB