Jaya Tiasa Holdings - Placement proceeds to repay debt and reduce interest expense HOLD

- We maintain HOLD on Jaya Tiasa Holdings Bhd, but with a lower fair value of RM8.12/share (vs. RM8.82/share previously), to account for the dilution in earnings stemming from the placement of 42mil shares. The valuation is now based on an unchanged 13x against a downward revised FY13F EPS of 62.5 sen vs. 67.8 sen previously.

- Jaya Tiasa yesterday announced the finalisation of its proposed private placement at M7.90/share, an 11% discount to the 5-day VWAMP up to 10 July of RM8.87. We deem the price to be fair, notwithstanding the further benefit of the impending 2-for-1 bonus issue for the placees.

- While slightly below our expected amount of at least RM7.94/share (based on a 10% discount to our previous fair value of RM8.82/share), the finalisation of the exercise bodes well for the company. This is in view of the dim prospects and reduced cashflow of the timber sector, and the need to sustain the growth of its oil palm division at lower costs.

- It will use RM100mil to pay off its borrowings within the next six months, interest expense, and another RM226mil for the construction of CPO mills within the next 24 months. Expenses, including for the proposed bonus issue, will amount to RM6.3mil. 

- To recap, its results for the 12 months to 30 April 2012 had disappointed on the back of higher-than-expected net operating costs and interest expense. This is another reason why the placement is significant, as it partly bolsters its balance sheet. Net gearing could decline to 0.4x from an estimated 0.6x for FY12F.

- Simultaneously, we have tweaked upwards the oil palm division’s PAT forecast by 13% to RM158mil for FY13F from RM140mil previously, partly on lower interest cost as well as lower expenses.

- We continue to expect the timber division to register anaemic growth with PAT at RM43mil and RM37mil for FY13F and FY14F, respectively – against FY12F’s estimated annualised PAT of RM59mil. 

- The prospects for timber for the rest of the year remain bleak, as the economic slowdown in major markets dampens demand for wood products. Log ASP is now traded at around US$170/cu m-US$180/cu m and plywood ASP is at about US$490/cu m. The Indian rupee, which significantly affects log prices, remains weak. 

- We maintain our stance that Jaya Tiasa’s prospects centre on the oil palm division, which is expected to account for about 80% of its FY13F and FY14F earnings. But for now, catalysts are lacking. Our CPO price assumption is at RM3,300/tonne.  

Source: AmeSecurities