Log price hike to benefit timber firms

Despite the strengthening ringgit, timber companies are set to benefit from the increase in logs and plywood prices, due to limited supply and steady demand from India and China.

“Log prices have been increasing as logs production was limited due to the unusual wet weather in the past few months. This has pushed the average price of logs up by 17% from a year-to-date low of US$180/m3 (in January) to the current US$210/m3,” an analyst told The Edge Financial Daily.

Moving forward, analysts said that timber prices would continue to increase due to dwindling log inventories in Japan, and the continual strong demand for logs from China and India.

“I don’t see prices coming down anytime soon, as demand from India and China continues to be strong moving forward,” the analyst added.

According to a report by RHB Research, the average log selling prices for local timber companies such as WTK Holdings Bhd, Jaya Tiasa Holdings Bhd and Ta Ann Holdings Bhd have been increasing year-to-date.

“Log selling prices currently achieved by all timber players (US$165/m3 to US$210/m3 due to different quality and size) under our coverage have generally experienced a rising trend from the start of this year, with exports mainly to India.

“The underlying rising trend for logs price bodes well for the timber sector, more so with the recent one-year extension of the 50% export quota by the Sarawak Forestry Department,” it said.

An analyst from a local research house shares RHB Research’s sentiments.

“Logs prices had seen a lot of movement in the second quarter this year due to the limited supply of logs affected by the bad weather.

“We have also seen some of the companies maximising their exports quota to 50% which benefits them, as logs give the best profit margins compared to downstream products such as plywood and sawn timber,” he said.

The analyst added that some timber companies are trying to maximise their log exports, as their plywood operations continue to make losses.

“Plywood prices might have increased, but the fact remains that they are still struggling as demand from Japan (which is their main market) has not improved to pre-crisis level,” he said, adding that the strengthening ringgit could continue to erode the thin profit margins for plywood.

“Among the companies, I am most bullish on Subur Tiasa as it has a wide export market and does not solely rely on (plywood) exports to Japan. They have also been the most consistent with their results,” said the analyst, who placed a target price of RM2.60 for the company.

For nine months ended April 30, 2010, Subur Tiasa’s net profit had increased 161.3% to RM23.84 million on the back of RM510.8 million in revenue.

Another analyst was bullish on WTK as it would be the first to benefit from the price increase of logs.

“WTK is a pure timber company that would leverage from the improving log prices. For the second quarter, they saw a turnaround to RM7.1 million in profit compared to the first quarter loss of RM5.5 million. Moving forward, I expect WTK to do better driven by increase in timber volume and better prices,” he said.


Plywood demand buoyed by improving Japanese housing data

While the outlook for log exports is getting brighter, the plywood sector which has been struggling has also seen some improvements, but with mixed views from analyst of whether it is sustainable.

According to RHB Research, it expects plywood prices to continue to increase as selling prices of plywood have increased by 17% year-to-date (YTD) in June. The price increase is contributed partly by the improving housing starts in Japan, which is a big importer of plywood from Malaysia.

“Japan housing starts in July saw a better-than-expected improvement, growing 4.3% year-on-year (y-o-y) and 0.1% month-to-month to 68,785 units. This signifies that Japan’s housing recovery may start gaining pace soon,” it said.

“This is supported by the number of building permits issued, which has been increasing for the eight months up to May 2010, and up 8.7% y-o-y.

“Going forward, we expect further improvement in Japan housing start to gain momentum and improve the overall sentiment for the timber sector.”

RHB Research also said the average selling prices of plywood had increased up to 17% YTD in June 2010.

“Following our recent round of talks with timber companies, we understand that the average selling prices for plywood have risen further by 4% to 6% in July to August,” it added.

Another analyst, however, was not bullish about plywood demand from Japan as the underlying Japanese economy is still uncertain.

“I do not foresee the housing starts data in Japan to be sustainable as the underlying economy of the country is still questionable. While demand might have improved in the past few months, I am not too certain of the future,” he added.

Production of timber normalised, says Ta Ann

A spokesperson from Ta Ann Holdings Bhd said timber production had normalised since August.

“Logs production was badly affected in May, June, July as it was raining, although it was traditionally a dry month. We expect production for the year to drop by 10% to 20%, but production should normalise for the rest of the year,” he told The Edge Financial Daily.

On the improving timber prices, he expects the price to hold up in the range of US$190/m3 and US$200/m3.

“Log prices have certainly risen from US$180/m3 last year. We have also been exporting about 50% of our log production, which is the maximum quota. We expect exports to improve the remaining of the year given the good demand from India,” he said, adding that 70% of its logs are exported to India.

For the first half ended June 30, 2010, Ta Ann saw its net profit halved to RM15.47 million on the back of RM298.33 million in revenue, due to lower log production hampered by the wet weather.

It also registered an unrealised foreign exchange loss of RM3.43 million for the second quarter, compared to an exchange gain of RM7.71 million a year earlier.

Nevertheless, Ta Ann’s stock price has continued to perform well. It closed at RM5.51 last Thursday, gaining 14.55% or 70 sen YTD.

WTK closed at RM1.13, gaining 5.61% or six sen YTD while Jaya Tiasa closed at RM3.54, gaining some 36% or 93 sen YTD. Subur Tiasa closed at RM2.14, gaining 7% or 14 sen YTD.


Written by Kay
The Edge Malaysia