Highlight Betting on Abenomics through timber stocks now

by **Cals** Tue 06 Aug 2013, 14:56

Highlight Betting on Abenomics through timber stocks now
Business & Markets 2013
Written by Ben Shane Lim of theedgemalaysia.com
Tuesday, 06 August 2013 13:43

THE tentative thaw in the Japanese economy, which has been stagnating for decades, could offer opportunities for Malaysian timber companies that have exposure in the world’s third largest economy.

With a solid majority in the upper house, Japan’s Prime Minister Shinzo Abe will now be able to press ahead with his brand of economic reforms, which has already begun to see some tentative promising results.

Last month, Japan’s finance minister Taro Aso said core consumer prices rose the fastest in almost five years, indicating a gradual shift from deflation to inflation. Its housing market also appears to be rousing from slumber as consumer confidence picks up.

“The Japanese CONSTRUCTION [] sector and overall Japanese economy is benefiting strongly from Abe’s dynamic new economic policies consisting of the ‘three arrows’ of Abenomics. The combination of monetary and fiscal stimulus has resulted in a rebound in economic growth and industrial production in 1H2013,” says Rajiv Biswas, Asia-Pacific chief economist at Singapore-based IHS Global Insights.

“Japanese residential construction starts were up 14.5% y-o-y by May. Construction starts for homes constructed from wood, which account for about half of total Japanese housing starts, have surged over the latest three months, with April starts 17.9% higher than a year ago, and May starts up 12.6% y-o-y. In actual yen value terms, total private sector housing investment is up 10.2% in May compared with a year ago,” he adds.

With more than half of Malaysian timber products exported to Japan, local exporters like TA ANN HOLDINGS BHD [], JAYA TIASA HOLDINGS BHD [], SUBUR TIASA HOLDINGS BHD [] and WTK Resources Bhd stand to benefit from a Japanese housing recovery, says CIMB Investment Bank analyst Saw Xiao Jun.

“A short-term catalyst [for the local timber industry] will be the increase in Japan’s consumption tax from 5% to 8%. This will push forward some of the housing demand to this year, increasing demand for timber,” says Saw, who expects timber stocks to come into focus in the second half of this year.

The sales tax will rise from 5% to 8% in April 2014, according to current government plans, and its scope covers housing construction.

Rajiv expects the Japanese housing construction industry to strengthen further in the second half of 2013 and early 2014, as new home buyers rush to beat the planned increase in sales tax.

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Tokyo’s Ginza shopping district ... While timber stocks will offer exposure to a Japanese recovery, a lot still depends on whether Abenomics pulls through

The risk, of course, is if the consumption tax is delayed, notes Saw, but taking an FY2014 earnings view, Japanese demand for timber is still positive and will continue to lift prices.

Looking back, Japanese import of timber products has been on a downtrend over the past 10 years. Demand for logs has been hit the hardest, with 2012 imports 64% lower then 2002 levels. The import of lumber and panel products fell 23.6% and 31.6% respectively during the same period. However, laminated timber products, which include plywood, rose 40%.

Timber pricing is not very transparent, but the best indicator comes from Japanese customs data, which tracks volume and total value of timber imported from Malaysia, says Saw.
He points out that imported Malaysian plywood prices fell 1% y-o-y in US dollar terms in May. However, this is mainly due to the sharp 25% depreciation in the yen over the past year. M-o-m, however, prices are up 7% in US dollar terms.
Note that 2012 also saw the post-tsunami reconstruction, which increased demand for construction materials, meaning past year comparisons come off a slightly higher base.

A weaker yen, a result of Abe’s policies, is negative for timber exporters, since it makes it more expensive for Japan to import timber, says Saw. “However, we believe the US dollar pricing of timber can be justified as most Japanese can still afford it,” he adds.

In the meantime, Saw points out that log prices have already been driven higher due to a combination of supply shortage in Sarawak, owing to seasonal wet weather, and higher demand from India.

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“In US dollar terms, plywood prices have risen marginally, but enough to offset any production cost increase from the minimum wage policy introduced earlier this year,” says Saw.

Those with the best exposure to Japan will be the “purer” timber companies such as WTK and Subur Tiasa, notes Saw. The two Sarawak-based companies have diversified operations into palm oil and other businesses, but earnings contribution from these divisions is small.

“However, Ta Ann might benefit more. It is exposed to higher production costs due to its operations in Tasmania. Therefore, its earnings will be more leveraged to any price increase. So, if plywood prices go up, Ta Ann will benefit,” says Saw.

Ta Ann managing director and chief executive Datuk Wong Kuo Hea says more than 90% of the group’s plywood production and 20% of its log production is exported to Japan. In fact, 39% of Ta Ann’s 2012 revenue came from the sale of timber products to Japan, notes Saw.

“Prices were stable in 2Q2013. There will be better prices in the second half of the year in the light of Japan’s economic recovery. Prices will improve in tandem with stronger demand, which will be driven by macroeconomic fundamentals of the Japanese economy,” Wong tells The Edge.

He notes that Sarawak is now entering the dry weather season and expects higher log production volumes. “We expect our full-year FY2013 log production volumes to be more or less at around last year’s volume.”

Meanwhile, Ta Ann’s share price is off its 52-week peak, closing at RM4.13 last Friday, down 13.6% over the past 12 months on weak timber and crude palm oil (CPO) prices.

“We see this as an opportune time to accumulate the stock as it is trading at an 18% discount to our sum-of-parts valuation,” notes Saw in a report earlier this month. He values Ta Ann at RM4.67.
WTK is another company that exports over 80% of its plywood to Japan. Unlike Ta Ann, however, its timber segment makes up the bulk of its earnings, with 76% profit contribution in FY2012. While Ta Ann’s gains in the timber space will be diluted by its performance in its PLANTATION []s arm, WTK will not be as affected given the smaller contribution from its oil palm operations.

WTK’s share price is trading just shy of its 12-month high of RM1.27, at its last close of RM1.22, which values the company at 11.69 times historical earnings, the cheapest among the four timber companies. By comparison, Ta Ann is trading at around 30 times earnings.

Jaya Tiasa, which has the highest number of timber assets of the four companies, with 420,000 cu m in annual capacity, draws about 63% of its revenue and 68% of its profit from its timber division.

Jaya Tiasa closed at RM2.10 last Friday, valuing the company at 37.5 times earnings and making it one of the more expensive timber counters. It is important to note, however, that its earnings have been diluted by its palm oil segment, which has been hampered by poor weather.

CIMB values Jaya Tiasa at RM2.36 per share.

Subur Tiasa is the smallest timber player of the four companies. Logging and manufacturing of timber products make up about 80% of its profits. At last Friday’s close of RM1.97, the group was valued at 22 times earnings.

Just like the other timber players, Subur Tiasa’s earnings have been battered by higher operating costs, particularly in the logging business, as well as wet weather.

While timber stocks will offer great exposure to a Japanese recovery, a lot still depends on whether Abenomics pulls through.

With 20 years of pent-up demand, Abe’s policies have already garnered improved sentiment from the housing market. However, the real economy will still need to show some improvement in its fundamentals if the rally is to be sustained, cautions Saw, who says that Abenomics, while unproven, is positive as it beats the alternative of inaction.

This story first appeared in The Edge weekly edition of July 29 - August 04, 2013.