Following a cut in CPO price assumptions, we lower our earnings projections and downgrade our timber sector call to NEUTRAL (from Overweight). While we continue to like the sector on a standalone basis on promising prospects for the log sub-division, this is offset by the flattish outlook for the plywood segment due to the unexciting demand prospects from Japan and weaker outlook for CPO prices.
Downgrading CPO price assumptions. We have downgraded the Malaysian plantation sector to NEUTRAL (from Overweight) while our CPO price assumptions have been lowered to MYR2,400/tonne (from MYR2,700) for CY14 and MYR2,500/tonne (from MYR2,900) for CY15.
Palm oil prices close to bottom. We believe palm oil prices are weeks away from a bottom and should strengthen in 4Q and CY15. That said, the current low levels will pull down the full-year average, hence the cut in our assumptions.
We expect CPO prices to strengthen in 4Q14 and 2015. This is due to: i) the seasonal slowdown in production in 4Q14 (CPO prices have risen by 11% since 2000 from end-September to end-December, ii) the slower-than-expected off-take for biodiesel in Indonesia in 2014 (caused by pricing issues) is no longer applicable while the distributioninfrastructure is being developed that should see Indonesia’s B10 programme going full swing in 2015, and iii) the downside for soybean price is limited as it is already trading at – or near – production cost. Though the stock/usage ratio will be high this year (>30%) due to the
bumper crop in the US, such a high ratio usually does not persist.
Reducing forecasts. We are reducing our earnings forecasts for all three timber stocks following the CPO price cut. Our forecasts for Jaya Tiasa (JT MK, SELL, FV: MYR1.81) has been cut by 19.8% for FY15(FYE June) and 24.6% for FY16. Our forecasts for Ta Ann (TAH MK, NEUTRAL, FV: MYR3.80) have been cut by 22.9% for FY14 and 28.2% for FY15. Our forecasts for WTK (WTK MK, NEUTRAL, FV: MYR1.40) have also been tweaked slightly downwards 4.0% for FY14 and 6.8% for FY15.
Downgrade sector to NEUTRAL (from Overweight). We continue to like the timber sector on a standalone basis, given the strength in log prices and rising sales volumes from India. However, this is offset by the flattish outlook for the plywood sub-division due to unexciting demand prospects from Japan as well as the weaker outlook for CPO prices. With the reduction in CPO price assumptions and, therefore, the earnings of all three stocks under our coverage, we have downgraded the recommendations on Jaya Tiasa to SELL (from Buy) and NEUTRAL(from Buy) for Ta Ann. Meanwhile, our recommendation for WTK remains a NEUTRAL. With two NEUTRALs and one SELL, we downgrade our timber sector recommendation to NEUTRAL.
Source: RHB
Created by kiasutrader | Jun 14, 2016
Created by kiasutrader | May 05, 2016