Jaya Tiasa - 2QFY13 a blip, longer term prospects are intact HOLD

- We are maintaining a HOLD on Jaya Tiasa Holdings Bhd, with a lower fair value of RM1.68/share (vs. RM1.90/share previously) as we roll forward our valuation to FY14F based on a 13x PE against a downward revised EPS of 13 sen (vs. 18.8 sen earlier).

- We have lowered FY13F-FY15F earnings by 27%-34%, following the release of Jaya Tiasa’s disappointing 2QFY13 results yesterday. We deem the results to be a blip, as its prospects remain intact on the back of the potential FFB growth and CPO price recovery.

- Jaya Tiasa’s 2QFY13 results fell sharply, slipping into a core net loss of RM6.3mil (1QFY13: RM15.5mil core profit; 3MDec11: RM22.1mil core profit). Its 2QFY13 net profit of RM2.9mil brings 1HFY13 earnings to RM17.4mil (-81% YoY) – representing only 12% of our earlier forecast and 16% of consensus. The core net profit for 1HFY13 totalled RM9.2mil (-84% YoY). The exceptional items comprise mainly derivative gains/losses and gains on disposals of assets.

- A confluence of factors had led to the precipitous decline in 2FY13:- 1) Higher sales volume of logs (+88% YoY) and plywood (+35%), and lower FFB production (-32% YoY, 24% QoQ) amid lower prices; 2) average CPO price at only ~RM2,200/tonne (-27% vs. 3MDec11’s ~RM3,000/tonne, -23% QoQ), log ASP at ~US$160/cu m (-21% YoY), and plywood at >US$500/cu m (-11% YoY); 3) the sale and use of low quality logs which had six months earlier been stranded upstream due to low river levels, and 4) continuing lacklustre demand for logs from India. These factors led to net operating costs surging by 38% YoY to RM262.7mil (+13.5% QoQ) despite revenue rising by only 13.5% YoY to RM286.2mil (+4.3% QoQ).

- We understand that the low quality log stocks had substantially been cleared in the local market. Another positive is that log export prices are currently still above the US$200/cu m level, and plywood at above US$500/cu m. Management has guided that the following quarters should show improvements, and the company would produce more of the higher-margin veneer for export. The company also says sentiment for the timber division is expected to turn positive with the improvement of US housing starts and the tight log supply conditions.

- Longer-term, while we are doubtful about any significant recovery in the timber market, we remain optimistic about Jaya Tiasa’s oil palm plantation operations. Against that backdrop, we maintain HOLD for the stock with a rolledforward valuation, not only due to the lack of catalysts in the near term, but also the heightened risks in both the timber and oil palm sectors. Any further share price weakness may present an opportunity to accumulate the stock for the longer term.

Source: AmeSecurities