Thursday, August 30, 2007

Timber and Tekala

Here's an excerpt of a write-up from KN on Tekala, another company in the timber sector.

  • 2. Sector Outlook

    Our previous Update Report dated 11 May 2007 had sounded caution about the prospect of plywood prices (in USD), which appears to have been adversely affected by the slow down of housing starts and built up of plywood inventories in Japan.

    The latest ITTO Tropical Timber Market Report and Japan Lumber Journal reported broadly lower prices from logs to plywood, citing higher inventories as the main reason for falling imports and prices.

    Japanese plywood traders have reportedly accumulated 5 months of inventories as a result of aggressive stockpiling earlier.

    Japan wooden housing starts were also slower than expected, registering declines of 1.8%, 7.8% and 5.8% y-y in April, May and June, respectively. Total housing starts in 1H07 dropped 4.0% y-y, dashing hopes that strong housing starts in Japan will keep plywood prices buoyant.

    3. Earnings Outlook and Recommendation

    We suspect that the timber sector’s down cycle may have just begun. Weakening prices could lead to sharp earnings contraction for most timber companies, and Teka la will not be spared. We are downgrading our FY08 revenue and net profit estimates to RM139.1m (-20.1%) and RM13.1m (- 41.8%), respectively.

    Following the earnings downgrade, we are downgrading Tekala from a HOLD to a SELL with a 12-month target price of RM0.70 (-33.3% from RM1.05), which is based on a FY08 P/E of 8x – a slight premium to the 5.0x – 7.5x P/E-range for its timber peers in view of its exposure to the “hot” oil and gas sector.

How's this for yet another second opinion?