We lower our FY16 log price assumption and reverse our assumptions to now reflect a decline in log prices in FY17 from an increase previously. Strong log prices and sharp depreciation of the INR against the USD have led to escalating cots for Indian log importers, who have started purchasing from other lower-cost sources, resulting in lower log prices. The rebound of MYR is a larger risk given Jaya Tiasa’s sensitivity, where every MYR0.10/USD change could impact earnings by 10-12%. Maintain NEUTRAL with a higher MYR1.61 TP (from MYR1.40, 3% upside), after we fine-tuned our DCF assumptions.

Softening log prices. Myanmar’s ban on log exports in Apr 2014 and the statewide clampdown on illegal logging at end-Apr 2014 sent log prices rising for nine consecutive months since Apr 2014. However, log prices have started its retreat since Oct 2015, as escalating log costs led Indian buyers to source forlower-cost logs. Meranti log prices averaged lower at USD283 per cu m in 4Q15, compared with USD291 per cu m for 9M15. We think current lower prices would be the case going forward, as log suppliers attempt to sustain buying interest from India – its single-largest export market.

Raising estimates. We trim our log price assumption by 1-2% for FY16-17(Jun) and expect a recovery of 3-4% in FY18 (from a projected rise of 2-8% forFY17-18 previously). However, we raise our FY16-18 FFB production forecastsby 1-2% as the relatively muted El Nino effect in Sarawak – as seen by the only slight rainfall deficit in 2Q-3Q15 vs its long-term rainfall average – could mean that FFB production may be less affected in FY16 -17. All in, we keep our FY16 earnings relatively unchanged but lift FY17-18 forecasts by 3-5%.

Maintain NEUTRAL with a higher TP of MYR1.61. With the earnings revision and after fine-tuning our DCF assumptions for the logs division and tweaking our MYR/USD assumptions for FY16-17 to 4.30/4.27 (from 4.28/4.15) to reflect the latest house view, we raise our SOP-based TP for Jaya Tiasa to MYR1.61.We make no changes to our target P/E of 16x for its oil palm plantation segment, replacement value calculation for its plywood unit and CPO price assumptions. Maintain NEUTRAL as we believe earnings would be held back by the still young age of its estates which continues to incur high production cost. We expect a more significant turnaround for its plantation division in FY17-18. We also remain concerned about the downside risk to earnings brought about by the strengthening MYR, emerging weakness in log prices and lacklustre plywood demand.

Main risks. These are: i) a continued rebound of the MYR against the USD, ii) deterioration in Japan’s economic recovery which results in a decline in the country’s housing starts, iii) Malaysia’s log production recovers in a significant manner or Indonesia lifts its ban on log exports, iv) a significant change in the direction of the MYR/USD exchange rate, and v) the imposition of import duties by large export markets like India and Japan.