WTK’s 1H15 core net profit was in line with our but below consensus expectations. No change to our SOP-based TP of MYR1.00 (implying a 10% upside) and NEUTRAL recommendation. While WTK will benefitfrom the weak MYR/USD going forward, this could be offset by weaker log and plywood production volumes, lower plywood prices and higher losses from its plantation division.

In line. WTK Holdings’ (WTK) 1H15 core net profit was in line with our expectations but below consensus, coming in at 55% of our and 43% of consensus’ FY15 forecasts. It recorded an EI loss of MYR6.9m, mainly relating to an allowance for impairment loss on receivables.

1H15 core net profit fell 15% YoY, while revenue dipped 8%. The decline in profits was seen on all fronts - the timber division (-36% YoY), the manufacturing division (-42% YoY) and the trading division (-2%),while higher losses were recorded at its plantation arm.

Log prices still improving, but plywood prices weakening. In 2Q15, log prices rose 10% QoQ, bringing 1H15 average price to USD273/cubic metre (cu m), up 15% YoY. Log sales volume rose by a slight 1% in 1H15, on the back of lower log production (-15% YoY). Plywood demand weakened, with sales volume falling 13.5% YoY in 1H15, while prices fell by a 7.7% YoY. As this price decline is higher than our projected 2.3% drop for FY15, we are revising our price forecasts downwards.

Tweak in forecasts. Our FY15 earnings forecast is relatively unchanged, while our FY16-17 forecasts are raised by 5-9%, after: i) imputing a 10% YoY decline in plywood prices in FY15 (from -2.3%) and a 2% decline for FY16 (from +1.6%), followed by flat prices for FY17(from +2.9%), ii) reducing our plywood sales volume by 5% for FY16-17 on the back of weak demand from Japan, iii) reducing our FFB price assumption for FY15 to MYR460/tonne (from MYR480), and iv) imputing our latest in-house MYR/USD exchange rate assumptions of 3.86/4.00/4.00 (from 3.70/3.80/3.80) for FY15/FY16/FY17, respectively.We highlight that every MYR0.10/USD change in exchange rate could increase WTK’s net earnings by c.13-15%.

Maintain NEUTRAL. Despite our earnings revision, our SOP-based TP is relatively unchanged at MYR1.00, as we have imputed our new inhouse risk premium and risk-free rate assumptions for our DCF calculation for WTK’s log division and reduced our 2016 P/E target for the plantation division to 15x (from 16x). No change to our NEUTRAL recommendation, as we believe valuations are fair at this juncture.