July 6, 2011

Timber in a sweet spot

Stock Name: TAANN
Company Name: TA ANN HOLDINGS BHD
Research House: RHBPrice Call: BUYTarget Price: 8.54



Timber sector
Maintain overweight: The outlook for Japan housing starts remains positive, although disruptions in the wake of the recent earthquake and tsunami will likely weigh on housing starts in the near term. According to Sekisui House Ltd, Japan's largest home builder, reconstruction-related housing demand is likely to come in strong to help to push Japan's annual housing starts above 900,000 units over the next two to three years, compared with 813,143 units in 2010.
While we do expect to see some easing of log prices in the near term, this is likely to have more to do with seasonal patterns as production should start to normalise when weather conditions improve. We do not expect log prices to come off very substantially from the current levels given that demand from India and China remains robust, while overall log supply can only increase by no more than 10% year-on-year (taking 2008 and 2009 production levels as well as the latest production quota as a guide).

According to the latest Japan Lumber report, plywood prices have remained firm so far in May and June at US$675 (RM2,031.75) to US$850 per cu m after the spike in March, which is in line with our expectations. We expect plywood prices will remain stable at this level for the next few months, before they start to rise again when reconstruction starts to gain pace.

We are positive on Ta Ann Holdings Bhd and Jaya Tiasa Holdings Bhd, as both companies have significant oil palm plantations similar to mid-sized plantation companies. Fresh fruit bunches (FFB) production for both companies is set to rise significantly over the next few years due to increasing mature hectarage.

The risks include: (i) lower than expected improvement in Japan's housing starts; and (ii) price discounting by neighbouring countries with lower cost of production, resulting in lower exports from Malaysia to its major export markets.

We maintain our 'overweight' call on the timber sector given robust near-term earnings growth for the timber division due to: (i) strong log prices owing to huge demand from India and China; and (ii) strong plywood prices due to increased demand from Japan for reconstruction activities. There will also be a significant boost to Jaya Tiasa and Ta Ann's earnings from the plantation division going forward due to increasing FFB production. ' RHB Research, July 6


This article appeared in The Edge Financial Daily, July 7, 2011.

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