We have cautioned that the MYR/USD exchange movement is the biggest catalyst and risk for timber firms’ earnings. We now fully incorporate our house’s latest MYR/USD assumption of 4.10/3.90 in our FY16-17 forecast(from 4.27/4.11), with a MYR reversal likely to negatively impact earnings. Nonetheless, we expect a strong FFB growth trajectory to more than offset earnings weakness in Jaya Tiasa’s timber division. Maintain NEUTRAL with a lower MYR1.55 TP (from MYR1.59, 6% upside).

Lower log prices could prevail, but prices are unlikely to tank. Meranti logprices – a benchmark measure – averaged 4.7% lower YoY in 1Q16 and 5.9%weaker than 2015’s average log price of USD289 per cu m. While log prices could hover at the lower levels seen currently, as buyers from India (Sarawak’slargest log export market) push/negotiate for lower prices, we think that scarcetropical log supply and still robust underlying demand from the South Asiannation should provide support for log prices.

Plywood demand not out of the woods yet. Demand for plywood remainssoft, with Japan’s total plywood import volume down 14.1% YTD-Feb 2016.Prices of plywood products, ie concrete panels and floor bases, fell 11% and12% YoY respectively in 1Q16. On the back of subdued plywood demand andslow housing starts, we expect plywood sales to flat-line in FY16-18.Cut estimates. We cut our earnings estimates by 17.1% in FY16 and 6-14.5%for FY17-18. This after adjusting for: i. Our house’s latest MYR/USD assumption; ii. The lowering of our log price assumptions by 6-9% in FY16-18; iii. The raising of our FY16-18 FFB production growth assumptions by 3-8%.

Maintain NEUTRAL. We maintain NEUTRAL on Jaya Tiasa with a lower SOPbased MYR1.55 TP. While the strengthening of the MYR, weaker log andplywood prices, and lacklustre demand for imported plywood could pressuretimber earnings, we expect earnings from its plantation division to k ick instrongly in FY17. This ought to help offset earnings weakness from thecompany’s timber division. We make no changes to our target 2016F P/E of 16xfor Jaya Tiasa’s oil palm plantation segment, replacement value calculations forits plywood unit and CPO price assumptions.

Main risks. These include a reversal in Japan’s economic recovery that resultsin a decline in the country’s housing starts, Malaysia’s log production recover ingin a significant manner, Indonesia lifting its ban on log exports, a significantchange in the direction of the MYR/USD exchange rate, and the imposition ofimport duties in large export markets like India and Japan.