Timber Sector - CPO price assumptions lowered, Ta Ann now a Hold OVERWEIGHT

- We downgrade Ta Ann Holdings Bhd to a Hold (from Buy previously), while maintaining a Hold for Jaya Tiasa. This stems from the lowering of our fair value for Ta Ann to RM3.79/share (from RM4.55/share previously) and for Jaya Tiasa, to RM1.90/share (from RM1.98/share previously).

- This follows the downward revisions in our CPO price assumptions to RM2,800/tonne and RM3,000/tonne, respectively, for 2013 and 2014, from RM3,100/tonne each previously – in tandem with our plantation analyst’s latest report on the plantation sector.

- For Jaya Tiasa, we have cut our earnings forecasts by 4% each for FY13F-FY14F (fiscal year-end 30 June). For Ta Ann, we have cut earnings by 17% for  FY13F and by 4% for FY14F (FY-end 31 December). Their fair values continue to peg their respective FY13F EPS to a PE of 13x.

- Both stocks have traded at an average forward PE of 16x in the past five calendar years. The PE of 13x represents an about -0.5SD of that five-year rolling forward PE mean.  This is justified given thestrong prospective growth of their oil palm division, and that it is slightly below the simple FY13F average PE of 13.6x for Malaysia-listed plantation companies.

- While the timber sector continues to be lacklustre, our investment thesis continues to be supported by the expected fast-paced growth in their respective oil palm division. For Ta Ann, the division is expected to account for about 90% of its pre-tax profit for FY13F-FY14F. For Jaya Tiasa, it would account for between 60% and 83% of PBT for FY13F-FY15F.

- For now, we are maintaining our FFB production assumptions. Notably, according to Jaya Tiasa’s Bursa announcements, its average monthly FFB production stood at 65,000 tonnes for the JulyOctober 2012 period. Assuming this continues and production touches 780,000 tonnes (+7% vs. our current assumption of 725,803 tonnes), its oil palm net profit could rise by >20% and the group’s bottom line by a further ~17% – adding a further ~30 sen/share value to the stock.

- Based on our estimates, Jaya Tiasa’s oil palm division is trading at an implied PE of 21x, and that of Ta Ann is at 15x. Note that, however, Jaya Tiasa’s timber division is still profitable, but that of Ta Ann would just about achieve break-even for FY13F as profit at the log division’s profit would be  offset by its plywood losses. 

- Catalysts for the sector include a strengthening rupee against the US dollar, better growth prospects in China and reconstruction in Japan gaining momentum. Risks include: 1) Lower-than-expected CPO prices, 2) Lower-than-expected FFB production, and 3) slower global growth prospects.  

Source: AmeSecurities