More Update on Timber Sector

A lot of bullish news on the timber sector lately: Timber product prices on the rise.

• Timber product prices on the rise
  By LEONG HUNG YEE
  
  PETALING JAYA: Prices of Malaysian timber products have been rising steadily as the raw materials shortage became critical as a result of tropical thunderstorms.
  
  CIMB Research said in a recent report the heavy rain in the country since February had affected timber-harvesting activities and could dent log and plywood supply over the next few months.
  
  “This could lead to a log shortage over the next few months, which is likely to translate into much higher timber prices if demand from Japan picks up quickly during the same period,” it said.
  
  CIMB said China could be one of the key factors in a major turnaround for plywood prices. It said China’s plywood production had declined since the government reduced the export rebate from 20% to 5% at end-2007. If the output continued to fall, a further recovery of plywood prices in the coming months could be expected, it said.
  
  “Although we believe the worst is over for the timber sector, we take a neutral stance until we see strong signs of a catalyst for the sector,” the research house said.
  
  Meanwhile, analysts said timber products prices were not soaring but gradually improving. They said the prices had risen partly because of the constraints on supply and high transportation costs due to rising oil prices.
  
  “While the construction industry in Japan is recovering, plywood manufacturers were not prepared to ease prices further.
  
  “Rising fuel costs had caused many manufacturers to resist cutting prices. Moreover, some manufacturers were expecting demand to pick up as several reconstruction projects will be launched in China to fix damage caused by recent winter storms,” an analyst said.
  
  Analysts continued to be optimistic about price stabilisation in the near future. However, they expressed concern over the volatility of oil prices as well as a possible recession in the US.
  
  According to Malaysian Timber Association president Datuk Sheikh Othman Rahman, industry players could expect to see better times ahead now that the worst is over for the local timber industry.
  
  He viewed the timber industry as a vibrant industry, contrary to market perception of it being a sunset industry.
  
  “Malaysia’s timber exports have risen to RM23.3bil in 2006 from only RM14bil in 1996, with the largest export markets being Japan, the US and China,” Othman said, adding that timber exports were forecast to reach RM50bil by 2020.
  
  Going forward, Othman expected timber companies to move towards more downstream production. He added that the Government had set up a special purpose vehicle to disburse RM1bil under a 15-year programme to plant 375,000ha of high-value timber trees by 2020.
  
  Meanwhile, two foreign brokerages, Merrill Lynch and Credit Suisse also issued calls to upgrade the timber sector last month.
  
  Credit Suisse issued a note to upgrade the Asian timber sector from neutral to overweight. Merrill Lynch's March 4 report said plywood prices had reached a bottom and had started to pick up.

And here is another news clip: Merrill: Plywood prices starting to rebound

• KUALA LUMPUR: The recent rising plywood price trend is lending support to our view that prices have reached a trough and are starting to rebound, said Merrill Lynch Research.
  
  It said according to forest products industry players, the recovery of plywood prices is gaining visibility and the upside impetus is expected to flow through to May. It said March concrete panel (CP) prices rose 11% month-on-month to US$480/m3 (RM1,536/m3), adding that indicative prices for April and May are also seeing another 10% higher month-on-month .
  
  “If this actuates, May CP price would be only 20% shy of all the all-time high,” it said.
  
  In a research note, it said that the Russian government will raise the softwood log export duty to 80% by January 2009. It opine that once the 80% duty is imposed, many plywood mills using Russian logs will be out of business, adding that this development would boost prices of log and plywood.
  
  It reiterated it’s buy recommendations on Ta Ann Holdings Bhd (34% upside) at a price objective (PO) of RM10.15 and WTK Holdings Bhd (40% upside) at a PO of RM3.30 on the back of improving industry fundamentals.
  
  “Both companies have long-term volume growth plans in place via forest planting and have also diversified into palm oil plantation.”

I had made 2 postings on this sector, Credit Suisse goes bull on Ta Ann and More on Timber Sector

Today RHB had a report on this sector and I was able to get a hand on the report.

In the second page, RHB analyst wrote abut the possibility that 'History May Repeat Itself'.

• Recall, in late-2006, in anticipation of the Russian export tariff hike from 6.5% to 20% effective July 2007, and coupled with the Indonesian government's efforts in curbing illegal logging, Japanese timber traders and stockists began stocking up logs and plywood. Sequentially, plywood prices soared to record levels in late-2006 (refer to Chart 4)....

I am less than convinced.

Yes, history can always repeat itself... but based on today's variables, I have my doubts.

• Based on current economical environment, with tighter global credits, would Japanese timber traders and stockists want to stock up their lumber???
• Look at the housing chart (chart 2) provided by RHB. The housing starts are showing the glaring difference between 2006 and 2008. Why would Japanese timber traders and stockists want to stock up their lumber??? ( See chart from RHB below)
  
  
  

How now my Dearest MooMooCow?

Would you want to be in this sector?

Do you see enough justifications to be in the timber sector?

Yes, they say that there recent timber prices have shown a rising trend and that it indicates that perhaps timber prices have bottomed but do I see enough strong reasoning that suggest that timber prices should surge?

Do I see clear signs that housing starts in Japan are increasing? And given the massive issue within the housing market in America, could one even contemplate a housing boom in Japan? Reasoning is simple here again, without housing boom in Japan, where will the demand of lumber come from?

And if there is no strong demand for lumber, would one ever see a boom in the timber sector?

However, RHB analyst thinks otherwise. In page 3 of their report, they wrote the following:

How?

Do I want to be in this highly cyclical sector under the current economical environment?

More on Timber Sector

The following article, Timber firms hit by slow demand was published on 29th Feb 2008.

• PETALING JAYA: The slowdown in Japan's housing construction sector has taken a big toll on the earnings of Malaysian timber companies.
  
  The profits of WTK Holdings Bhd and Lingui Developments Bhd fell sharply last year against that reported in 2006 due to poor demand for timber products from Japan, the key export market for Malaysian timber companies.
  
  However, the timber industry may be coming out of the woods, as there are nascent signs of recovery in demand, which has in turn pushed up prices.
  
  “The orders for plywood products picked up in February and prices are recovering.
  
  “But we don't expect a big jump in prices. It will be a gradual climb,” Ta Ann Holdings Bhd chief executive officer Datuk Wong Kuo Hea told StarBiz yesterday.
  
  According to him, the price of structured plywood increased to US$410 per cu m (month-on-month) compared with US$370 per cu m, the lowest level recorded in August-September last year. Prices peaked at US$560 per cu m in 2006.

Yesterday, RHB had a research report, saying that they reckon that perhaps the worst could be over.

• The worst could be over. Japan's imports of plywood have grown at an average of 6.5% p.a. over the last two consecutive months. This is due to the beginning of a gradual recovery in housing starts in Japan.
  
  Plywood prices are set to grow. YTD, concrete panel and floor-based plywood prices have declined 30% and 32% respectively. However, prices are expected to rise in April given some speculative purchases on the back of the recovery in housing starts.

So the key would be the gradual recovery in housing starts in Japan, yes?

If the Japan housing starts do not recover, then the chances of recovery for the local timber sector would be slim, yes?

Today, there's an article posted on Star Biz again, Japan housing starts fall at slower pace

• TOKYO: Japan's housing starts declined at the slowest pace in eight months in February, a sign that the world's second-largest economy is recovering from the building slump driven by a change in construction regulations.
  
  Ground broken on new homes and condominiums slid 5% from a year earlier after falling 5.7% in January, the Land Ministry said in Tokyo yesterday.
  
  A recovery in starts, which plunged to a four-decade low last year, may help Japan weather the fallout from the slowdown in the US, its largest export market. The housing slump wiped more than 1 percentage point from the nation's 3.5% annualised growth last quarter.
  
  “This confirms housing starts will stop damaging the economy,'' said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute here. “That's one big reason why Japan will probably avoid a recession.''
  
  The declines have been easing since September's 44% drop, which was the biggest since the government began keeping comparable figures in 1965.
  
  On an annualised basis, builders broke ground on 1.15 million new homes and condominiums, yesterday's report showed.
  
  Housing starts have mostly recovered, the government said in its monthly economic report for March.
  
  “We expect the economy to expand gradually with exports on a rising trend and the effect of the revised Building Standards Law having run its course,'' the government said.

How?

Random Musing on the Timber Sector

Hope you do not mind but I decided to make some random musing on the timber sector.

In the timber sector, in my opinion, there are only two investment grade stock, WTK Holdings and Ta Ann. They are the leaders in the sector for their superior earnings performance and this has been reflected perfectly in the stock market.

Let's look at the recent performance of WTK Holdings until June 2007 ( I will show the bigger pix next). Now WTK had a recent stock Bonus Issue and share split ( see Entitlement - Others ). The below chart represents a priced adjusted chart to account for this corporate exercise. Chart is provided by Kenwealth.



I placed two jelly beans on the chart as simple markers. The first lower jelly bean indicates an ADJUSTED price of roughly 1.16 in Jan 2006. And the upper jelly bean indicates a price of 3.90 in April 2007. Hence an investment in WTK HAD BEEN EXTREMELY profitable for an investor despite the fact that WTK belongs to the highly cyclical timber sector.

They say earnings is always the main catalyst for a stock to appreciate much higher.

Back for its fy 2005 earnings, WTK earned some net earnings of 53 million. A year later its fiscal 2006 earnings rocketed to 127 million. ( See Quarterly rpt on consolidated results for the financial period ended 31/12/2006 - do note the extremely impressive cash flow generated for that fiscal year 2006! - and you can see this older blog posting on WTK - About WTK )

However, the recent two earnings, the weakness in earnings was seen. This was their May earnings note, Quarterly rpt on consolidated results for the financial period ended 31/3/2007 and this was their earnings reported recently Quarterly rpt on consolidated results for the financial period ended 30/6/2007 ).

So in May it announced it made 29 mil. Last month, WTK announced it made only 15 mil. Sharp decline in earnings? Remember the last 2 quarters of its last fiscal year, WTK was earning around 46 million plus!

Now for this fiscal year, its half year earnings totals only some 44 mil. At such a pace, WTK would probably be making less than 90 mil this fiscal year. Which would be a massive decline when compared to its fiscal year 2006 earnings.

Now back to the charts. Let me show you the full WTK chart, meaning to say, let's look at how the market is reacting to the current weakness in WTK's earnings.



WOW!

Yes, can you see how WTK share price is plunging?

This chart depicts the clear and precise danger in investing in cyclical stocks. When the cycle turns for either good or bad, the reaction in the market price would be simply drastic.

WTK's sharp increase in earnings saw it enjoyed a truly wonderful life. Its share simply soared. And when its earnings turned, indicating that perhaps the good fortune in the timber cycle has ended, the stock simply plunged.

Now let's look at Ta Ann.

Ta Ann earnings jumped from some 81 million to some 130 million for its fy 2007. Quarterly rpt on consolidated results for the financial period ended 31/12/2006

And its current half year earnings, TA Ann earned only some 50 million. A clear indication that perhaps this year, its fiscal year earnings would disappoint. Quarterly rpt on consolidated results for the financial period ended 30/6/2007

Have a look at the chart for Ta Ann.



WOW! Dejavu?

Anyway, again Ta Ann enjoyed incredible success. One could have purchased Ta Ann for around 4.80 back in June 2006 and a year later, one's investment would have soared to some 11.50! Now this is investment, eh?

But like WTK, the share has taken a drastic turnaround and top be more precise, the share price is plunging just like WTK Holdings!

How?

Would you use market leaders such as WTK Holdings and Ta Ann as an indicator for the timber sector?

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?