WTK waiting for Japan recovery
In The Edge Financial Daily Today 2012
Written by theedgemalaysia.com
Wednesday, 24 October 2012 10:36
WTK Holdings Bhd
(Oct 23, RM1.07)
Maintain market perform at RM1.09 with a revised fair value of RM1.05 (from RM1.10): Key highlights of our visit:
(1) Log demand from India has slowed down and WTK is neither logging nor exporting at maximum quota;
(2) Plywood sales are hampered by anti-Japan sentiment, and pricing visibility is still low; and
(3) Oil palm planting is progressing slowly.
For the year to August, WTK’s log production fell 18% year-on-year (y-o-y) to 293,363 cu m. Annualised, this would translate into 440,000 cu m for FY12 (-17% y-o-y), a far cry from its log harvesting quota of 700,000 cu m to 800,0000 cu m per year. The reason for the reduction was not because of difficulties faced with harvesting or weather issues, but because demand from India has been weak and WTK chose not to log aggressively.
We understand that in 1HFY12, WTK only exported about 35% of its logs produced despite the government allowing a log export quota of 50% of production. So far in 3QFY12, WTK has seen some signs of demand and prices improving, which we believe could be due to anticipation of seasonal tightness of logs in the upcoming monsoon season. As a result, WTK stepped up log production in July and August.
On the plywood front, WTK did see some reconstruction activity in 1H, which resulted in sales volumes rising 23% y-o-y. However, indicative orders for the fourth quarter have weakened again, possibly due to the anti-Japan sentiment in the market, which has suspended demand temporarily. Based on these indicators, we estimate WTK’s utilisation rate in FY12 to be about 75%. Despite the improvement in volumes in 1H, average prices have remained relatively flat y-o-y.
We understand plywood manufacturers in Malaysia and Indonesia have been trying to raise prices in Japan since April, but this has not been successful thus far. However, the bid to raise prices has now shifted to December orders, and according to Japan Lumber’s latest report, Shin Yang managed to obtain a 5% to 6% price hike for concrete panel orders to be delivered in December. This is positive, although the impact will only be felt from FY13.
We cut our FY12 to FY14 earnings forecasts by 7.2% to 13.9%. Risks are:
(1) Lower-than-expected timber prices;
(2) Slower-than-expected recovery in Japan’s economy;
(3) Significant hike in glue and logistics costs; and
(4) Bad weather conditions that hamper log production volume.
While we believe timber prices may not fall much further from hereon, sales volume and demand are questionable, as long as Japan’s economic recovery remains uncertain. As 80% to 90% of WTK’s plywood goes to Japan, we believe this is a crucial catalyst for the company.
Post-earnings revision, our indicative fair value for WTK is revised to RM1.05 (from RM1.10) based on an unchanged target PER of nine times FY13 EPS. We maintain our “market perform” recommendation on the stock. — RHB Research, Oct 23
This article first appeared in The Edge Financial Daily, on Oct 24, 2012.
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