Lingui Developments Bhd
(Nov 8, RM1.26)
Maintain sell at RM1.24 with a target price of 94 sen: Although core net profit in the first quarter ended Sept 30, 2010 worked out to 110% of our forecast on an annualised basis, we deem it as within our and market expectations. This is because we expect weaker earnings in the remaining quarters due to higher transportation costs and a likely weakening of the US dollar.
Also within expectations was the decision against an interim dividend per share.We maintain our earnings per share forecast and target price of 94 sen which we continue to base on the stock’s 12-month average price-to-book value ratio of 0.4 time. Until the company can deliver sustainable quarterly earnings, we will continue to use asset-based valuation for the stock.
Lingui remains a sell, with the potential downside catalysts being a weaker-than-expected recovery in Japan’s housing market, and an oversupply in the plywood market. Worth noting are the potential anti-dumping duties by South Korea and other countries.
Lingui recorded a RM39 million net profit in the first quarter. However, stripping out a RM16 million gain from changes in the net fair value of its plantation assets and RM7 million unrealised foreign exchange gains, core net profit was only RM16 million.
Core earnings over the next few quarters could be weaker. Although log and plywood prices should remain firm in FY11, this is expected to be offset by the stronger ringgit as timber products are priced in US dollars. Also worth noting is rising transportation cost due to high crude oil prices.
Demand remained strong for logs during the quarter, mainly from India and China. Lingui sold 188,662 m3 at an average selling price of RM461 per m3, a 7.2% quarterly increase.
During the period, Lingui exported 62,531m3 of plywood, down by an annual rate of 18%. On anti-dumping duties. South Korea is expected to make a decision on plywood imported from Malaysia by year-end. — CIMB Research, Nov 8
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