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Malaysia: Timber earnings likely to increase
Earnings of timber companies are likely to improve in 2015 driven by favourable ringgit and higher log prices. However, analysts noted that there is limited upside in timber stocks given the unexciting earnings outlook for their non-timber businesses such as palm oil which has a downside risk if crude palm oil (CPO) prices stayed at the current level. The research arm of CIMB Investment Bank Bhd (CIMB Research) in a recent report said it expected the average price of Sarawak export logs to rise by US$10 to US$15 per metric tonne (five to seven per cent) but plywood could decline around US$10 per metric tonne (circa two per cent). It added that 2015 should be a much better year for the sector on the back of a six per cent decline in ringgit against US dollar last year. “Also, the timber players should benefit from higher log prices given the improved outlook for India’s economy,” it said. The research arm said that it raised its 2015 Meranti Regular price forecast (the benchmark price for Sarawak export logs) to US$295 per metric tonne from US$280 per metric tonne as it believed higher log prices are warranted in view of tight supply and stronger demand for tropical logs this year. It highlighted, “Our channel checks suggest that the supply of tropical logs will continue to decline due to depleting timber stocks in the concession areas. The government has stepped up its efforts to curb illegal logging in Sarawak. “On top of that, the ongoing ban on log exports by Myanmar since April 1 last year will restrict the supply of tropical logs in the export market.” On the other hand, it noted that demand for tropical logs should continue to grow from increasing demand in India, the largest importer of tropical logs. Apart from that, CIMB Research pointed out, plywood might face price pressures from weaker demand from Japan due to the weak yen. It explained, “We expect plywood prices to inch down to US$580 per metric tonne in 2015 from US$590 per metric tonne in the first 11 months of 2014 (11M14) due to weaker demand from Japan – the world’s largest importer of tropical plywood.” However, the research arm opined a weaker ringgit should offset the earnings impact of lower plywood prices. It said, “The ringgit, which lost six per cent of its value against the US dollar last year, will be the key earnings growth driver given that timber products are priced in US dollar while production costs are mostly ringgit-denominated.” As for the implementation of goods and services tax (GST), CIMB Research said it should have minimal direct impact on timber production cost as timber products are mostly exported. On the other hand, cheaper crude oil prices should reduce the cost pressures on timber players as fuel and glue account for 10 to 15 per cent of timber production cost, the research arm said. Apart from that, for timber companies’ under its coverage, CIMB Research noted that the valuations of Jaya Tiasa Holdings Bhd (Jaya Tiasa) and Ta Ann Holdings Bhd (Ta Ann) have been driven more by earnings from palm oil than that of timber. “As the current CPO price of RM2,322 remains below our full-year forecast of RM2,460 per tonne, there is a downside risk to palm oil earnings should CPO price stay at current levels,” the research arm outlined. However, CIMB Research noted that timber companies are generally optimistic about their earnings prospects in 2015 as timber prices have recovered. Timber companies are also adopting strategies that could further boost their timber revenue and improve cost efficiencies in order to stay competitive. These include selective harvesting, redeployment of resources, and investment in modern machineries. The companies will also stick to their diversification efforts to broaden their earnings base beyond timber, the research arm said. “Jaya Tiasa and Ta Ann will continue to channel timber cash flows to their palm oil business while Eksons Corporation Bhd (Eksons) seeks new landbank for property development,” it commented. Overall, CIMB Research maintained a ‘neutral’ view on Malaysia’s timber sector.
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