Investment Merits

• A leader in the timber industry

• Significant contributions from the oil palm division going forward

• Beneficiary of a weaker MYR against the USD

Company Profile

Jaya Tiasa Holdings (Jaya Tiasa) is involved in the manufacturing and distribution of plywood, logs and other timber products. It is also involved in the cultivation of oil palms.

Highlights

Timber giant in Sarawak. Jaya Tiasa is one of Malaysia’s largest timber companies. It has timber concessions of over 700,000ha in Sarawak. While its timber division has been the group’s bread and butter, the subdued timber outlook – affected by macroeconomic forces – has seen slower growth in recent times. The tightening of state regulations has also hampered log production, which had already been dragged down further by weaker global demand. Plywood prices have also been weak. We estimate that it has fallen by over 11% as at Dec 2016 from its high of USD500 per cu m in Mar 2016.

Palm oil segment’s turnaround. The weak timber outlook has been offset by Jaya Tiasa’s turnaround at its oil palm operations, which started development in 2002. The group has a sizeable oil palm estate with an estimated 69,589ha of plantable area to date. Of this, over 54% of its trees are in the prime mature age as at end-FY16 (Jun). This is estimated to rise to 65% as at end FY17. Jaya Tiasa’s plantation average age profile stands at approximately eight years and FFB yields can potentially be as high as 22.3 tonnes per ha. Coupled with strong CPO prices currently, with 1HFY17 averaging at MYR2,791/tonne, we believe the group is on track to post record earnings in its palm oil division.

Beneficiary of a weak MYR. Timber companies are highly sensitive to fluctuations in the MYR/USD. This is as the bulk of their revenues are denominated in USD while the majority of their costs are in MYR. As such, Jaya Tiasa is a beneficiary of the weak MYR outlook ahead. Our house assumption has forecasted for MYR/USD at 4.43/4.25 for FY17-18 respectively. We estimate that every MYR0.10/USD change could impact the group’s earnings by up to 10-12%.

Company Report Card

Latest results. Jaya Tiasa’s recent 2QFY17 results disappointed slightly due to lower contributions from the timber division. Its palm oil segment, however, was able to offset timber’s lower contributions due to higher yields and the current favourable CPO prices. The latter, realised for 2QFY17 at MYR2,760 per tonne, also helped in offsetting declining production volumes as a result of weather conditions.

Balance sheet/cash flow. As at Dec 2016, Jaya Tiasa’s net gearing is at 56%. We estimate this to improve to 50% in FY17 on stronger cash flow and profit generation.

ROE. The group achieved an ROE of 3% in FY16, but we expect this to grow to 5%/6% in FY17-18 respectively on the back of its palm oil segment. An upside risk would be stronger-than-expected contributions from its timber segment.

Management. Jaya Tiasa is helmed by the Tiong family. Sarawak tycoon Tan Sri Tiong Hiew King is a major shareholder in the group, with an over 22% stake. His family members also sit on the board of directors.

Recommendation

We like Jaya Tiasa for its strong palm oil outlook, as we project for the group’s 3-year earnings CAGR to grow at 22%. As plywood prices are seen to have bottomed in 2016, we also expect stronger contributions from this segment going forward. Our SOP-derived TP of MYR1.61 implies a 28% upside to current share price as at the time of writing. This TP is based on a DCF value for Jaya Tiasa’s log operations, replacement value for its plywood unit and a target 17x FY17 P/E for its plantations division. Our implied FY17F P/E and P/BV is at 13x and 0.6x respectively.

Source: RHB Securities Research - 5 May 2017