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?

About WTK

My dearest Moo Moo Cow,

Were you aware of the issues regarding WTK Holdings purchase of Linshanhao Plywood (Sarawak) Sdn Bhd. This issue was highlighted on last weeks Edge Weekly: 9 Apr 2007: Corporate: Seeing red over WTK's plywood buy

Firstly, this deal was announced on 27th July 2006. W T K HOLDINGS BERHAD ("WTK" or "Company") PROPOSED ACQUISITION OF 100% EQUITY INTEREST IN LINSHANHAO PLYWOOD (SARAWAK) SDN BHD

Now let's look at the issues mentioned about this purchase by WTK.

• Shareholding dilution, and not a high purchase price, is likely the main reason the Employees Provident Fund (EPF) and Lembaga Tabung Haji objected to WTK Holdings Bhd's acquisition of a plywood company. The EPF is the largest institutional investor in WTK with a 11.31% stake. Tabung Haji holds a 3.8% stake. The largest shareholder in the company is the WTK group with a 33% stake. In a shareholders' meeting to deliberate the deal last Monday, the two institutional investors made known their objections to WTK's directors. The EPF called for a ballot and the majority of shareholders voted in favour of the deal. It was reported that the two institutional investors opposed the deal due to the high valuation.

Well, how bad is the dilution?

In that announcement, there is a word file attached. If you open it, you will see the following table.

11,600,928 new shares will be issued, which is a dilution about 7%.

Is this a serious dilution?

And then the problem is WTK is now trading at 8.35. And these new shares were only valued at rm4.31!!! So accordingly it was a windfall for some.

• However, higher selling prices of timber products due to greater demand have boosted the bottom line of many timber companies, including WTK. The stocks of these companies have increased significantly in value. For WTK, its share price has doubled in the past nine months. The counter closed at RM8.60 last Thursday. This means that the vendors of Linshanhao get a windfall of about RM50 million, as they will be getting WTK shares that have a market price of RM8.60, which is 100% more than the price the shares were valued at nine months ago.

Ah, yes it is a huge windfall but..

• WTK is a timber company with an 850,000ha concession in Sa­ra­wak. It trades and processes timber logs. One of its downstream pro­ducts is plywood. The company is buying Linshanhao Plywood (Sarawak) Sdn Bhd for RM150 million, to be paid with RM100 million cash and the rest via issuance of 11.6 million new shares priced at RM4.31 per share. The contention is the price the new shares are issued at. When the deal was announced in July 2006, WTK shares were trading at about RM4.30.

WTK was trading at 4.30 on 27th July 2006 when the deal was announced. How? Can we call the deal unfair?

• Regardless of the shareholding dilution affect, a market observer says, "To price the new shares at 5% to 10% below the market price is reasonable to sweeten a deal. But to issue them at 50% below the market price is unreasonable."

Well I wonder if this market observer observed the price of WTK when the deal was announced back in July 2006.

How?