Falling demand and prices, Japan’s prolonged recession and environmental concerns have all taken their toll, turning investors away from the commodity that had earlier created untold wealth.
Is there light at the end of the tunnel? Are timber stocks worth a relook?
Timber has certainly made many Malaysians rich. It is well known that timber players, particularly those in Sabah and Sarawak, the two states that are richly endowed with the natural resource, made their money in the 1970s and 1980s from vast timber concessions.
Many prominent tycoons from Sarawak, such as those from the Tiong and Ling families, made their money in timber before branching into banking, property, media and other interests.
The wealth creation from timber was not limited to just the big players. Retail investors also got a piece of the pie in the 1990s, when timber stocks were market darlings.
In particular, the 1993-94 super bull run saw fortunes created overnight when the mere rumour of a new timber concession or acquisition would fuel a buying frenzy among investors.
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Of course, there were also the “infamous” and more speculative counters such as Aokam Perdana Bhd, Idris Hydraulics (M) Bhd, CASH Bhd and North Borneo Timber Bhd, among many others, that rose much faster and higher, and eventually crashed during the 1997/98 Asian financial crisis.
It has been a downhill ride for timber stocks since then.
Growing environmental concerns and Japan’s seemingly never-ending recession have taken their toll on demand and prices. Japan is the biggest consumer of Malaysian timber. Increased investor interest in other more exciting commodities like palm oil and oil and gas, have also taken the shine away from timber.
Today, the stock prices of Lingui and WTK Holdings Bhd are languishing, hovering around the RM1 mark, and down as much as 90% from their all-time peaks set in the mid-1990s. Ta Ann has been more resilient, falling by 55% to RM5.20 from its all-time high of RM11.50 three years ago.
But that was also due to better timing: Ta Ann was listed in November 1999, after the Asian financial crisis.
Signs of recovery
It is unlikely these stocks will ever climb back to their stratospheric highs. But equally though, the worst may also be over for the timber sector, although the recovery will likely be gradual.
Last year, Malaysia’s timber exports fell 14.5% to RM19.49 billion from RM22.79 billion in 2008. It was the lowest level since 2006.
This was mainly due to the economic recession last year that severely impacted the housing sector and resulted in the decline of timber exports, said Malaysian Timber Council (MTC) CEO Cheah Kam Huan.
“Timber exports were hit hard by the financial crisis last year but in the first quarter of 2010, we have seen it rise 24.5%. I can safely say that we can achieve a 10% increase in exports this year,” Cheah told The Edge Financial Daily in an exclusive interview. (See related story on this page.)
He said the housing market in Japan, which is the main importer of Malaysian timber, was seeing increasing demand for timber products such as plywood and logs.
According to Japan Lumber Journal data, the first quarter of 2010 saw a 6.3% increase in wooden structures in the housing market. Owner-occupied houses also rose 4.2% to 63,992 from 61,630 units a year earlier.
After contracting 5.2% in 2009, Japan’s economy is expected to grow 1.8% this year, according to a median forecast by the Bank of Japan, due to China’s robust growth and government stimulus spending.
“The price of European laminated posts increased by ¥400 (RM14.41) a piece compared to the same period last year. Meanwhile, plywood prices also increased due to low supply from Malaysia and Indonesia,” said MTC.
The only way to go is up
Local analysts said the timber market hit rock bottom last year, and it could only go up this year. They are also optimistic about the timber sector this year, with eight out of 14 reports or 57% recommending a buy on major players.
“Timber exports recovered slightly in the first half of the year but are largely dependent on the flailing Japanese housing market. At the moment, the housing industry in Japan has not stabilised due to its bad underlying economy,” said an analyst at a local research house.
He said big timber companies such as Ta Ann and WTK exported a lot of their products, especially plywood to Japan.
“These companies were hit badly at the beginning of last year when the pricing reached rock bottom. The main industry players export about 90% of their products to Japan. However, things are beginning to recover as we see prices increasing,” he told The Edge Financial Daily.
Last year, Malaysia saw its timber exports to Japan drop by 22.9% to RM3.75 billion from RM4.87 billion in the previous year due to the economic downturn.
Based on analysts’ reports released this year, only Ta Ann and Subur Tiasa are expected to outperform, with almost universally bullish recommendations.
On the other hand, analysts have mixed reactions about Lingui, Jaya Tiasa and WTK, recommending buy, hold and sell calls in almost equal proportions.
“Only Subur Tiasa has exceeded my expectations and they have continued to do well because they export to a few markets and does not rely solely on Japan,” the analyst said.
Standard & Poor’s Malaysia Sdn Bhd has a strong buy call on Subur Tiasa, and hold calls on WTK, Lingui and Jaya Tiasa Holdings. KAF Seagrott & Campbell Bhd recommends a buy on Lingui, WTK and Ta Ann.
As upbeat as analysts are on these stocks, it remains to be seen if investor interest will return to this long ignored sector.
Last Friday, Ta Ann closed at RM5.20, Lingui at RM1.08, and WTK at RM1.14. Jaya Tiasa and Subur Tiasa were traded at RM3.30 and RM2.04 respectively.
Timber players in oil palm plantations
Looking forward, the local research analyst said the outlook for logs would continue to improve this year as its demand had been stable unlike other timber products.
He added that companies had also diversified into oil palm plantations that would see more contributions when the timber market was down.
“These companies have diversified into palm oil in order to sustain their earnings due to the timber downcycle. Jaya Tiasa has the biggest oil palm plantation land bank with 60,000 ha. Ta Ann has already harvested 52,000 tonnes of fresh fruit bunches after four years,” he said.
On MTC’s forecast of a 10% increase in timber exports for the year, Cheah said indications were promising with strong numbers for the first half of the year.
According to MTC, timber products have seen a 24.5% increase in exports for the first quarter of 2010 compared with the preceding quarter.
Logs have seen the biggest increase of 73.2% to RM569.9 million from RM329.1 million, followed by medium-density floorboard with 58.7% to RM289.2 million, from RM182.2 million.
“Apart from exports, pricing in early 2009 also hit rock bottom. It has started to pick up at the beginning of this year, and how it would improve would depend on how the housing market is going to turn out. I think that the 10% forecast is achievable,” said the analyst.
He added that companies like Ta Ann were also exploring markets in Europe and the Middle East to minimise their reliance on the Japanese housing market.
“There is also a potential growth in eco-plywood which is more environment-friendly. Japan is certainly heading towards this direction while Europe has expressed interest. Ta Ann is certainly looking into that,” he said.
Another analyst said the recovery would be gradual. “The industry peaked in 2007 due to strong demand from the construction industry and the Middle East market was booming. However, it slumped to the bottom in 2008 and has dragged on until now. It would take another 10 years before it improves,” he said.
He added that it was the trend for timber players to move into plantations during a downtrend.
“A lot of trees planted here are hardwood used for construction, building mainframe and railway tracks, and it takes 20 years to mature. As such, timber players have planted semi-hard wood in its place, as it only takes 10 years to grow. Hence, we would see less supply of hardwood in the future,” he said.
On the Japanese housing market, he said indications were promising at the moment with the appointment of a new prime minister.
“However, it is still hard to say whether a turnaround would occur,” he added.
Will timber stocks ever regain their lost lustre? Only time will tell if the recent recovery in timber demand is sustainable or just another flash in the pan.
Written by Max Koh & Koo Jie Ni
This article appeared in The Edge Financial Daily, July 12, 2010.
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