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Wednesday, September 10, 2014

Timber - Downgrading On CPO Price Assumption Cuts


Following  a  cut  in  CPO  price  assumptions,  we  lower  our  earnings projections  and  downgrade  our  timber  sector  call  to  NEUTRAL  (from Overweight). While we continue to like the sector on a standalone basis on  promising  prospects  for  the  log  sub-division,  this  is  offset  by  the flattish outlook for the plywood  segment  due to the  unexciting demand prospects from Japan and weaker outlook for CPO prices.

Downgrading  CPO  price  assumptions.  We  have  downgraded  the Malaysian  plantation  sector  to  NEUTRAL  (from  Overweight)  while  our CPO  price  assumptions  have  been  lowered  to  MYR2,400/tonne  (from MYR2,700) for CY14 and MYR2,500/tonne (from MYR2,900) for CY15.
Palm oil prices close to bottom. We believe palm oil prices are weeks away from a bottom and should strengthen in 4Q  and  CY15. That said, the current low levels will pull down  the full-year average, hence the cut in our assumptions. 
We expect CPO  prices to strengthen in 4Q14 and 2015.  This is  due to:  i)  the  seasonal  slowdown  in  production  in  4Q14  (CPO  prices  have risen  by 11%  since 2000 from end-September to end-December, ii) the slower-than-expected off-take for biodiesel in Indonesia in 2014  (caused by  pricing  issues)  is  no  longer  applicable  while  the  distributioninfrastructure  is  being  developed  that  should  see  Indonesia’s  B10 programme going  full swing in 2015,  and  iii)  the downside for soybean price  is  limited  as  it  is  already  trading  at  –  or  near  –  production  cost. Though  the  stock/usage  ratio  will  be  high  this  year  (>30%)  due  to  the
bumper crop in the US, such a high ratio usually does not persist. 
Reducing  forecasts.  We  are  reducing  our  earnings  forecasts  for  all three timber stocks following the  CPO  price cut. Our forecasts  for Jaya Tiasa  (JT  MK,  SELL,  FV:  MYR1.81)  has  been  cut  by  19.8%  for  FY15(FYE  June)  and  24.6%  for  FY16.  Our  forecasts  for  Ta  Ann  (TAH  MK, NEUTRAL, FV: MYR3.80)  have been cut by 22.9% for FY14 and 28.2% for FY15.  Our forecasts for WTK  (WTK MK, NEUTRAL, FV: MYR1.40) have also been tweaked slightly downwards 4.0% for FY14 and 6.8% for FY15. 
Downgrade  sector to  NEUTRAL  (from  Overweight).  We continue  to like  the  timber  sector  on  a  standalone  basis,  given  the  strength  in  log prices and rising sales volumes from India. However, this is offset by  the flattish  outlook  for  the  plywood  sub-division  due  to  unexciting  demand prospects  from  Japan  as  well  as  the  weaker  outlook  for  CPO  prices. With  the  reduction  in  CPO  price  assumptions  and,  therefore,  the earnings  of all three  stocks  under  our coverage,  we  have  downgraded the recommendations on Jaya Tiasa to SELL  (from Buy) and NEUTRAL(from  Buy)  for  Ta  Ann.  Meanwhile,  our  recommendation  for  WTK remains  a  NEUTRAL.  With  two  NEUTRALs  and  one  SELL,  we downgrade our timber sector recommendation to NEUTRAL. 

Source: RHB

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