Jaya Tiasa is likely to continue facing headwinds in  2HFY15 (Jun), with a  lower  logging  harvest,  weather-affected  FFB  yields,  and  sombre timber and CPO prices. We maintain our SELL recommendation on the stock  with  a  MYR0.85  TP  (55%  downside).  There  is  however,  some benefit  to  be  seen  from  the  weakened  MYR/USD  rate,  which  would benefit the company’s primarily export-oriented timber earnings.  
 
Key  meeting  highlights.  On  our  recent  visit  to  Jaya  Tiasa,  we  came away  with  six  key  highlights:  i)  logging  harvest  slowed  in  FY15,  ii)  the impact of the new log licencing policy and illegal logging crackdown will only  be  felt  in  the  longer  term,  iii)  patchy  earnings  at  plywood  division,    iv)  FFB  production  was  affected  by  wet  weather  in  Sarawak,  v)  it  is taking  over  from  subcontractors,  and  vi)  it  invested  in  a  new  refinery  in Bintulu.

2HFY15  likely  to  remain  unexciting.  Jaya Tiasa’s  weak  earnings  in 2QFY15 look set to continue into 3QFY15, with losses likely to be seen in both the plywood and plantations divisions again. The log division will continue  to  be  the  only  profitable  division,  while  the  company  will  also benefit from the weaker MYR, which will boost timber export earnings. 

Forecasts  rise  to  reflect  changing  exchange  rate  assumptions. We lift  our  earnings  forecasts  by  6.3-9.3%  for  FY15-17  after  taking  into account changes in our in-house MYR/USD exchange rate assumptions to  MYR3.50  (from  MYR3.40)  for  FY15,  MYR3.55  (from  MYR3.45)  for FY16  and  MYR3.50  (from  MYR3.40)  for  FY17.  We  have  also  lowered our  FFB  production  growth  estimate  for  FY15  to  0%  (from  +3.8%)  and our  oil  extraction  rate  (OER)  assumptions  to  16-7%  (from  17-18% previously) for FY15-17.  

Maintain  SELL.  Post  earnings  revision,  our  SOP-based  TP  rises  to MYR0.85  (from  MYR0.80)  by  applying  an  unchanged  16x  2015  target P/E to its plantation division and a 12x 2015 target P/E to its timber unit. Despite Jaya Tiasa’s strong FFB production growth coming from the increasing maturity of its estates, this is more than offset by the impact of lower  CPO  prices  and  the  weakness  seen  in  the  plywood  division.  We note  that  every  MYR100/tonne  change  in  CPO  prices  would  affect  its earnings by 6-8% per annum. Maintain SELL. 

Key meeting highlights. On our recent visit to Jaya Tiasa,  we came away  with six key  highlights:  i)  logging  harvest  slowed  in  FY15,  ii)  the  impact  of  the  new  log licencing  policy  and  illegal  logging crackdown  will  only  be  felt  in  the  longer  term, iii) patchy earnings at plywood division, iv) FFB production was affected by wet weather in  Sarawak,  v)  it  is  taking  over  from  subcontractors,  and  vi)  it  invested  in  a  new refinery in Bintulu.

Logging harvest slowed in FY15. Jaya Tiasa has been hit with a spate of bad luck recently. Its logging harvest has been weaker than expected (-5% YoY in 1HFY15), especially  when  compared  to  WTK’s  (WTKH,  NEUTRAL,  TP:  MYR1.10)  log production growth of +17% YoY in the same period,  given that WTK’s concession is in a similar area to Jaya Tiasa’s. However, management highlighted that unlike WTK, its log concessions had been producing at close to quota levels for the last few years and  could  be  taking  a  breather  after  a  few  years  of  peak  production.  Management expects the overall log harvest for the year to pick up strength in 2HFY15, to register flat  growth  for  FY15.  We  have  been  more  conservative,  projecting  a  2.3%  YoY decline in log production for the year.  

Impact  of  new  logging  licence  policy  and  illegal  logging  crackdown.  While management  expects  the  overall  impact  of  the  new  logging  licence  policy  and  the illegal logging crackdown to have a positive impact on log prices as it would reduce overall log supply, it is likely to take a long time before the positive effects are seen. Recall  the  new  logging  licence  requires  the  timber  concessionaires  to  obtain sustainable  certifications  before  the  licence  is  renewed  for  a  60-year  period.  Jaya Tiasa  does not expect  to  face  any  problems getting its certifications, as it  has  been complying with sustainable logging practices all along.

Patchy  earnings  at  plywood  division.  Its  plywood division’s earnings have been relatively  patchy  over  the  last  few  quarters,  fluctuating  between  profits  and  losses. This  is  due  to  the  relatively  sombre  plywood  prices,  given  the  unexciting  demand prospects. Jaya Tiasa’s average selling price for plywood in USD fell by 9% YoY and 11%  QoQ  in  2QFY15,  due  to  a  change  in  species  mix  sold  during  the  period.  Plywood  demand  has  weakened  over  the  last  few  quarters,  falling  by  16%  YoY  in 2Q15, due to economic uncertainty in its main export markets.  The company’s main plywood markets are Korea, Taiwan, Hong Kong/China, Japan and the Middle East – with Korea and Taiwan being its two largest markets. Management expects plywood demand  growth  to  improve,  and  become  relatively  flat  YoY  in  FY15.  We  have projected a less optimistic 7-8% decline in plywood sales for FY15.  

FFB  production  affected  by  wet  weather  in  Sarawak.  As  for  its  plantation operations,  Jaya  Tiasa’s  FFB  production  growth  in  2QFY15  has  also  been disappointing,  falling  27%  QoQ  and  14%  YoY,  bringing  1HFY15’s production down by  3%  YoY.  This  was  on  the  back  of  management’s  previously-targeted  FFB production  growth  of  >30%  YoY,  coming  from  the  improving  age  profile  of  its  trees and approximately 3,500ha of new areas coming into maturity in FY15.   In 7MFY15, this  declined  further,  to  -7.7%  YoY.  Management  highlighted  that  the  reason  for the weak  productivity  was  the  wet  weather  in  Sarawak  which  caused  flooding  at  its estates,  which  are  mostly  in  the  coastal  areas  of  Sarawak.  This  flooding  occurred from Dec 2014 to Feb 2015, and is therefore expected to also have a negative impact on  productivity  in  3QFY15.  Management  is  in  the  midst  of  revising  its  FY15  FFB production  targets.  In  light  of  the  above  information,  we  are  also  cutting  our  FY15 FFB  production  forecasts  further  to  reflect  flat  FFB  production  (from  +3.8% previously). For FY16-17, we maintain our FFB growth of 15-20% per annum. Given the  weak  productivity,  we  believe  it  is  likely  Jaya  Tiasa  would  continue  to  record losses at its plantation division in 3QFY15 (2QFY15: MYR5.1m pre-tax loss).

Taking over from subcontractors. Management also highlighted that it has, since 1 Feb 2015, ceased using subcontractors to look after its plantation estates, and taken over the plantation workers from the subcontracting company as its direct employer. While this move will change the cost structure of its plantation operations, the overall unit  production  cost  should  remain  the  same,  according  to  management. Management  is  hopeful  that  this  change  will  result  in  better  productivity  as  the plantation workers would be better incentivised.

Investment  in  new  refinery  in  Bintulu.  As Jaya  Tiasa should  complete  all its new planting of its plantable landbank by end-FY15, it is on the lookout for new plantation land to acquire. However, at this juncture, there is nothing that is in the final stages of negotiations. In 1HFY15, it planted up 1,300ha of new land, and is targeting to plant up the remaining 600ha by 2H15.  JT’s most recent investment was to subscribe for a 10% stake in Borneo Edible Oils (BEO) via the issuance of new shares for MYR5m. BEO  is currently  a  dormant  company  but  has  a  licence  to build  a  CPO  refinery  and kernel  crushing  plant  in  Bintulu.  The  remaining  stake  in  BEO  is  held  by  related companies Rimbunan Hijau, Rimbunan Sawit, Subur Tiasa and Palmgroup Holdings S/B.  We understand the refinery  will have a  daily capacity of 1,500 tonnes  and will cost  MYR207m.  In  terms  of  pricing,  this  translates  to  c.MYR420/tonne,  in  line  with industry  standards  of  MYR300-500/tonne.  Management  highlighted  that  CPO production from the related companies comprising Jaya Tiasa, Rimbunan Sawit and Subur Tiasa totals around 360,000 tonnes per annum currently, which would be just enough to service the refinery. The refinery is expected to commence operations by Oct 2016. Although the short-term prospects of the refining business may not be too rosy currently, in the longer term, we believe this refinery could help it reduce margin leakages and create positive synergies.

Risks
Main risks. i) a reversal in Japan’s economic recovery, resulting in an improvement 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 rise in CPO prices.
 
Forecasts
Raising earnings forecasts to reflect the change in exchange rate assumptions. Overall,  we  raise  our  net  profit  forecasts  by  6.3-9.3%  for  FY15-17  after  taking  into account a change in our in-house MYR/USD exchange rate assumptions to MYR3.50
(from  MYR3.40)  for  FY15,  MYR3.55  (from  MYR3.45)  for  FY16  and  MYR3.50  (from MYR3.40)  for  FY17. We  have  also  lowered  our  FFB  production  growth  estimate  for FY15  to  0%  (from  +3.8%)  and  our  OER  assumptions  to  16-7%  (from  17-18% previously) for FY15-17.   
 
Valuation and recommendation
Maintain SELL. Post earnings revision, our SOP-based TP is tweaked to MYR0.85 (from  MYR0.80)  by  applying  an  unchanged  16x  CY15  target  P/E  to  its  plantation division and a 12x CY15 target P/E to its timber division. Despite Jaya Tiasa’s strong FFB production growth coming from the increasing maturity of its estates, this is more than offset by the impact of lower CPO prices and the weakness seen in the plywood division.  We  note  that  every  MYR100/tonne  change  in  CPO  prices  would  affect  its earnings by 6-8% per annum. Maintain SELL. 

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

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

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Source: RHB