We  maintain  our  NEUTRAL  stance  on  the  timber  sector.  The  log division continues to be the main bright spot, coupled with the positive impact of  a stronger USD on timber exports. This is, however, offset by the weak sales volumes for plywood and the flattish CPO price trend. Our top sector pick is Ta Ann, while WTK remains a Neutral and Jaya Tiasa a Sell.

Log production strong in 2014, but may reverse in 2015. In 2014, log production in Sarawak rose 6.1% YoY. However, in the first few months of  2015,  log  harvests  have  declined  due  to  heavy  monsoon  rains  in Sarawak. This is already evident from the decline in logging harvests in the  first  two  months  of  2015  recorded  at  Ta  Ann  ( -26.5%)  and  WTK (-25%), although Jaya Tiasa recorded a slight +1.4% improvement from a low base. We believe log harvests in Sarawak may be flattish in 2015, given  the  weak  1Q15  numbers.  Meranti  log  prices  are,  therefore, expected to continue rising in 2015. In Feb/Mar 2015, prices are up 18% YoY. Although this is higher than our projected price increase of 4-6% for 2015-2016, we prefer to remain conservative for now.  

Watch  out  for  impact  of  China’s  logging  ban.  We  believe  supply constraints  will  continue  to  e  the  theme  in  the  long  term.  The  latest development is the Chinese Government’s recent announcement that it intends to phase out commercial logging in all natural forests by 202 0. In total,  it  is  anticipated  that  there  will  be  a  loss  of  around  49.9m  cubic metres (cum) of annual harvests from  China’s  natural forests. Although Chinese  softwood  logs  do  not  compete  directly  with  Malaysia’s hardwood  logs,  there  is  some  level  of  substitution,  albeit  of  a  limited amount. In the long term, we believe this ban, if implemented properly, will  add  to  the  already-huge  gap  between  timber  demand  and  supply, which would bode well for log prices, whether hardwood or softwood.

Japan  out  of  recession.  In  4Q14,  Japan’s  GDP  returned  to  positive territory  of  0.6%,  thereby  pulling  the  economy  out  of  a  recession. However, housing starts continued to fall, dropping 8.9% YoY in 2014, and a further 13% YoY in Jan 2015. This was exacerbated by the very bad weather in northern and western Japan at end-2014 and early 2015, which brought construction to a halt. This should continue to translate to lacklustre  plywood  prices  in  the  medium  term,  although  log  supply constraints could offset some of the impact of weak housing starts.

Maintain NEUTRAL.  For the timber division, we believe log demand will be stable while log prices will rise on supply constraints. However, this would be offset by weak plywood sales volumes and lacklustre plywood prices. FFB production should increase on improving maturity of oil palm plantations  hectarage,  but  sombre  CPO  prices  would  be  a  dampener. We maintain our target 2015F P/Es of 10.0-12.0x for the timber divisions and  16.0x  for  the  plantation  divisions.  We  have  one  BUY recommendation (Ta Ann; PT: RM4.42), one NEUTRAL (WTK; PT: RM1.10) and one SELL (Jaya Tiasa; PT: RM0.85).

Source: RHB Research - 26 Mar 2015