9M15 earnings surpassed expectations superbly, benefitting from the leveraged impact of the weak MYR/USD rate, which boosted PBT margin in the timber division by 6.6ppts QoQ in 3Q15. We lift our SOP-based TP to MYR1.45 (from MYR1.20, 18% upside). Maintain BUY on WTK as it is one of the prime beneficiaries of the weak MYR, with a 3-year earnings CAGR of 23% and an attractive P/E valuation of <10x.

Beat expectations by a mile. WTK Holdings’ (WTK) 9M15 core net profit beat both our and consensus expectations, coming in at 85-97% of FY15 forecasts. It recorded an EI gain of MYR1.1m, relating to a forex gain recorded in the manufacturing division.

9M15 core net profit rose 22% YoY, while revenue improved by 2%. The improvement in profit came mainly from the timber division (pretax profit +7% YoY), as WTK benefitted from the leveraged impact of the weak MYR/USD rate, which depreciated by 18.6% YoY in 9M15. This was offset by weaker contributions from the manufacturing division (pretax profit -13% YoY) and higher losses at its plantation arm.

Improvement in plywood sales volume coming through. In 9M15, log prices were up 8.5% YoY. Log sales volume fell 8.1% YoY in 9M, although log production only fell 1.3%, which implies that some inventory could be held back during the quarter. Plywood demand improved in 3Q, as sales volume rose 2% YoY in 9M15, up from -13.5% YoY in 1H15, although prices remained weak, declining by 7.8% YoY.

Raising forecasts. We lift our earnings forecasts by 53-56% for FY15-16 and by 12-13% for FY17, to take into account the leveraged impact of the weak MYR on earnings. Our forecast currently assumes exchange rates of MYR3.90/MYR4.30/MYR4.20/USD 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 BUY, with higher SOP-based MYR1.45 TP. We believe WTK is one of the prime beneficiaries of the weak MYR/USD, as the bulk (close to 90%) of its earnings is in USD, while its costs are in MYR. Also, with the continued strengthening of log prices, we expect earnings to grow by a 3-year CAGR of 23% pa over the next three years. Valuations are at attractive levels currently, below its 3-year historical P/E average of 10x. Key risks include a significant change in the direction of MYR/USD movement and a reversal in Japan’s economic recovery.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

WTK Holdings Bhd is involved in the harvesting of timber and the manufacturing of plywood and sawntimber. All of its natural forest concession, plywood mills and sawntimber mills are situated in Sarawak.

Recommendation Chart

Source: RHB Research - 30 Nov 2015