Jaya Tiasa Holdings - Weather and India pent-up demand may come into play

-  We maintain HOLD on Jaya Tiasa Holdings Bhd, with an unchanged fair value of RM1.98/share based on a 13x PE FY13F EPS of 15.2 sen.

-  As noted earlier, Jaya Tiasa’s 1QFY13 results disappointed on the back of higher net operating costs (+33% YoY vis-à-vis an only 11% rise in revenue) stemming from higher production and sales volume for lower selling prices.

-  Significantly, FFB production rose over 45% YoY and by an estimated 48% compared to the preceding three months to 195,589 tonnes. CPO production volume rose 56% YoY and by 44% compared to the preceding three months to 17,161 tonnes. The average CPO price realized fell 8% each YoY and QoQ to RM2,918/tonne. (See Table 3)

-  We have earlier cut our FY13F average CPO price assumption to RM2,850/tonne (from RM3,300/tonne previously), leading to a 26% downward revision in our earnings forecast for the year. This assumes the average CPO price recovers to at least RM3,100/tonne in 2HFY13.

-  According to Jaya Tiasa’s announcements on Bursa Malaysia, its average monthly FFB production stood at 65,000 tonnes for the July-October 2012 period vs. an average of over 40,000 tonnes in the previous 14-month period. If this trend continues, FFB production could touch 780,000 tonnes for FY13F – at least 7% higher vs. our current assumption.

-  YoY, log ASP fell 9% to RM549/cu m from RM606/cu m a year earlier, while plywood ASP fell 11% to RM1,691/cu m (See Table 3). Management guides that it expects timber prices to improve give a seasonally anticipated log shortage due to detrimental weather in the latter part of the year and early next year. 

-  Log exports to India could also improve next year due to pentup demand vis-à-vis the current weakening Rupee that has affected buying from that country. This is after a year of declining buying activity from India and the downstream industry there would have to start buying logs to continue operations.

-  Management has also guided that it may focus on manufacturing more veneer (which is used for the production of plywood) for exports to markets such as Taiwan. Veneer currently garners better margins than the finished plywood. We understand that logs and plywood are currently still trading near 1QFY13 levels. 

-  We maintain HOLD for now, with a downside bias, not only due to the lack of catalysts, but also the heightened risks in both the timber and oil palm sectors. Recovery for both may only be realised in the latter part of FY13F.  

Source: AmeSecurities