Given Jaya Tiasa’s earnings volatility, our earnings-based valuation methoology may be inappropriate at this point in time. As such, we are switching our valuation methodology for the timber division to DCF anda replacement cost method, until earnings show a marked improvement and are less volatile. Our SOP-based TP rises to MYR1.45 (12% downside), while we maintain our SELL recommendation.

Volatility in earnings… Jaya Tiasa’s core net profit has been rather volatile over the last few years, ranging from as high as MYR151m in FY11 (Jun) to as low as MYR23m in FY13, before recovering to MYR70m in FY14. This has been due to the volatile plywood and CPO prices, as well as the weather wreaking havoc on productivity for both logs and FFB. This has hit the company particularly hard, given the already-thin plywood margins and the relatively young age of its palm oil estates (averaging 6-7 years).

…makes a P/E-based valuation inappropriate for now. Given this volatility and the losses seen in both its plywood and plantation divisionsover the last two quarters, we believe our earnings-based valuation methodology may be inappropriate at this point in time. As such, we are switching our valuation methodology for the timber division to a DCF and replacement cost method – until earnings show a marked improvement and are less volatile.

SOP-based TP increases to MYR1.45. We split the timber segment’svaluation into the two sub-divisions – logs and plywood. For the log division, we are using a DCF valuation (WACC: 6.4%) over a period of 60 years (concession period), assuming a long-term log price and log production cost, as well as a fixed volume of log exports (based on 50% of harvest). For the plywood division, we are using a replacement cost valuation method, assuming a cost of MYR210m for Jaya Tiasa’s 420,000 cubic metres (cu m) of plywood capacity. For the plantation division, our P/E target of 16x 2015 on plantation earnings is unchanged. As such, our SOP-based TP rises to MYR1.45 (from MYR0.85).

Still a SELL. We maintain a SELL on the stock. Despite Jaya Tiasa’s strong FFB production growth from the increasing maturity of its estates, this is more than offset by the impact of lower CPO prices and the weakness in its plywood division. We note that every MYR100/tonne change in CPO prices would affect its earnings by 6-8% per annum.