Ta Ann Holdings - Benefits From Timber Price Uptick

Given our recent timber sector upgrade, we are lifting our forecasts and target  price  and  upgrading  our  recommendation  on  Ta  Ann  to  BUY (from  Neutral).  Although  the  benefit  from  an  improving timber industry outlook  would  be  somewhat  diluted  by  weaker  contributions  from  its plantation  division,  Ta Ann’s valuations are relatively undemanding, trading at the low end of its historical P/E range of 12x-16x. 

- Upgrades  timber  sector  to  OVERWEIGHT.  In  our  2  Aug  report,  we upgraded the timber sector to an OVERWEIGHT (from Neutral). We are now more positive on the sector’s prospects given a strong recovery  in log  prices  and  Japan’s improving economic activities,  which  translate into rising plywood imports. Although plywood prices have yet to enjoy a similar re-rating as logs, we believe such a move is on its way, given the general 4-6 months’ lag to pass on higher log costs.  

- Log prices already up 20-30%  y-o-y; plywood prices should re-rate soon. Malaysian tropical log prices have been rising steadily since April 2013,  due  to  a  shortage  of  logs  in  the  global  market.  Currently, Malaysian log prices are about USD250-270/cu m, up 20-30% y-o-y. We expect log prices to hold at current levels for the rest of the year and for 2014.  This  means  that  average  log  prices  would  be  about  USD230-250/cu m in CY13, rising by 8-9% to USD250-270/cu m in CY14. While plywood prices have not moved up as significantly yet  (only up 3-5% y-o-y  and  q-o-q),  we  believe  this  is  on  the  way,  given  the  general  4-6 months’  lag  to  pass  on  higher  log  costs.  We  are  projecting  average plywood prices to rise by 3-5% in CY13 and by a further 4-6% in CY14.

- Upgrading  forecasts,  target  price  and  recommendation.  We  are lifting  our  forecasts  for  Ta  Ann  by  28%  for  FY13 and by  40%  for  FY14. Besides  raising  our  log  and  plywood  price  assumptions,  we  are  also incorporating  a  weaker  USD/MYR  exchange  rate  for  FY13  of MYR3.10/USD  (from  MYR3.00/USD),  while  leaving  our  MYR3.00/USD assumption  for  CY14  unchanged,  which  would  bode  well  for  exporters like Ta Ann. Post-earnings forecasts, we raise our SOP-based fair value (16x  CY14  for  plantations  division  and  12x  CY14  for  timber  division)  to MYR4.37  (from  MYR3.28)  and  upgrade  our  recommendation  to  BUY (from Neutral).