WTK’s 1Q15 earnings disappointed, due to low log production and larger start-up losses at its plantation division. We cut our earnings forecasts and our SOP-based TP to MYR1.08 (6% upside), but maintain our NEUTRAL recommendation. Although prospects for the log division are still positive, this is offset by the weaker outlook for plywood, while the plantation division is likely to be negative for a few more years.

Below expectations. WTK Holdings’ (WTK) 1Q15 core net profit was below expectations, coming in at 10% of our and consensus FY15 forecasts. The main variance was lower-than-expected log production which fell 28% YoY (vs our -8% projection for FY15), due to the wet monsoon season in 1Q15. It incurred MYR2m losses at its plantation division in 1Q15 (vs our projected MYR3m loss for FY15), relating to planting costs expensed off upon maturing of its estates.

1Q15 core net profit fell 51% YoY, while revenue dipped 6%. The decline in profits was seen on all fronts - the timber division (-62% YoY), the manufacturing division (-49% YoY) and the trading division (-11%), while losses were recorded at its plantation arm.

Log prices still improving, but plywood prices weakening. In 1Q15, log prices rose 5% QoQ to USD260/cubic metre (cu m). On a YoY basis, prices were up 16%. Log sales volume, however, fell 33% QoQ, but rose 21% YoY on the back of strong demand. Plywood demand weakened, with sales volume falling 10% QoQ and YoY, while prices fell by a slight 2% QoQ and 7% YoY. With continued weakness in Japan’s housing starts, we expect plywood prices to moderate by 1-2% in FY15. For logs, given the still-strong demand from India, we project prices to continue the uptrend, rising 5-6% in FY15.

We cut our FY15F-17F numbers by 10-20%, after imputing higher losses for the plantation division and lower log production for FY15 of -14% (from -8%). We keep our log production flat for FY16-17.

Still NEUTRAL. We maintain our NEUTRAL recommendation, with a lower SOP-based TP of MYR1.08 (from MYR1.15). Although (together with the weaker MYR) prospects for the log division are still positive, this is offset by weaker fundamentals of the plywood division, while we believe contribution from its plantation business is likely to be negative for a couple more years.

Source: RHB Research - 28 May 2015