Short Term: Trading Buy
Sarawak
log prices have remained firm despite the sharp correction in the
Indian rupee in the past three months, based on our channel checks. Log
prices continue to be supported by resilient Indian demand and
expectations of tight log supply in the coming quarters. We stick to our
view that the average FOB price of Meranti Regular, the benchmark price
for Sarawak export logs, will stay at around US$280 per m³ in 2H13 and
2014. We maintain our Trading Buy sector call. Potential re-rating
catalysts are higher timber earnings driven by higher plywood prices in
4Q13. Our call is not Overweight as we do not expect the re-rating to
sustain beyond the short term. Our top pick is Ta Ann.
We
stick to our view that the average FOB price of Meranti Regular, the
benchmark price for Sarawak export logs, will stay at around US$280 per
m³ in 2H13 and 2014. We maintain our Trading Buy sector call. Potential
re-rating catalysts are higher timber earnings driven by higher plywood
prices in 4Q13. Our call is not Overweight as we do not expect the
re-rating to sustain beyond the short term. Our top pick is Ta Ann.
What Happened
The
FOB price of Meranti Regular has been US$280-290 per m³ in September,
according to Japan Lumber Reports. The 9% fall in the Indian rupee
against the US dollar in the past three months seems to have had a
limited impact on Sarawak log prices so far. Based on our channel
checks, log demand from India remains resilient while the supply of
tropical logs is expected to decline in 4Q due to seasonally wet
weather.
What We Think
The
overall price trend for Sarawak logs is in line with our forecast. We
expect the average price of Meranti Regular to hover around US$280 per
m³ in 2H13 and 2014, supported by India's growing demand for tropical
timber and tight log supply as a result of declining log production from
natural forests in Sarawak and the log export ban in Myanmar starting
Apr 2014. Myanmar is a significant supplier, accounting for about 17% of
global tropical log exports and 26% of India's tropical log imports in
2011, according to the International Tropical Timber Organization
(ITTO).
What You Should Do
Stay
invested. While a prolonged weakness in the Indian rupee may cause log
prices to fall from its current level, we expect its impact on timber
companies' earnings to be more than offset by the higher plywood prices,
potentially driven by strong housing starts in Japan. We prefer Ta Ann
over Jaya Tiasa as it offers higher share price upside while its
plantation earnings are less susceptible to the weaker CPO prices.
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