WTK’s  9M14  earnings  were  slightly  below  expectations,  owing  to higher-than-expected effective tax rates. Maintain NEUTRAL. We reduce our  FY14-15  earnings  by  4-6%  and  cut  our  TP  to  MYR1.25  (from MYR1.32) based on an unchanged target P/E of 10x CY15, suggesting a 1.6% upside.  Although prospects for the log division are still positive, this is offset by weaker fundamentals at the plywood division.

Higher  effective  tax  rates.  WTK  Holdings’  (WTK)  9MFY14  core  net profit  was  below  expectations,  coming  in  at  62%  of  our  and  55%  of consensus’ FY14 forecasts, respectively. The main variance was higherthan-expected effective tax rate recorded in 3Q14 of 34% (up from 20% in  1HFY14).  Assuming  taxes  return  to  normal  in  4Q14,  FY14  e ffective tax  rate  would  come  down  to  25%,  which  is  still  higher  than  our  20% assumption. We are therefore raising our effective tax rate for FY14 to 25%, while leaving our 24% projection unchanged for FY15 .  

9MFY14  core  net  profit  fell  8%  YoY,  on  the  back  of  a  2%  drop  in revenue. Although WTK’s timber division recorded a 34%  YoY growth in PBT,  this  was  offset  by  lower  contributions  from  its  manufacturing division  (-48%  YoY).  In  9MFY14,  timber  revenue  rose  1%  YoY  mainly due  to  higher  log  prices  (+15.6%),  higher  log  volumes  (+11.3%)  and higher plywood prices (+10%), offset by lower plywood volumes (-9.6%).   Log  prices  still  on  uptrend,  plywood  prices  stable,  but  volumes down.  In 3Q14,  log prices  rose  5%  QoQ  to USD260/cu m, while on a YoY basis, prices were  up 18%. Log  volumes declined slightly QoQ  by 6%, although it was up 16% YoY.    Plywood demand  weakened further, with  sales  volumes  falling  27%  QoQ  and  11%  YoY  in  3Q14,  although prices remain  relatively stable.  This is likely on the back of Japan falling back into recession and housing starts falling 7.1% YoY in 9M14. 

Forecasts  cut.  We  reduce  our  FY14  earnings  forecast  by  4.6%,  after raising  our  effective  tax  rate  assumptions.  We  also  cut  our  FY15 earnings  forecasts by 5.7%,  imputing relatively flat plywood  prices (from +2-3%) in view of the current scenario in Japan. We introduce our FY16 earnings forecast. 

NEUTRAL  maintained.  We  maintain  our  NEUTRAL  recommendation, with  a  lower  TP  of  MYR1.25  (from  MYR1.32),  based  on  unchanged target P/E of 10x CY15. Although prospects for the log division are still positive, this is offset by weaker fundamentals at the plywood division, while contribution from the plantations division is still insignificant.

Source: RHB