PP 7767/09/2010(025354)

21 June 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
21 June 2010
MARKET DATELINE

Timber Sector Recom : Neutral

(Maintained)
Japan Housing Starts Improved Due To Low Base
Effect

Table 1 : Timber Sector Valuations

Fair EPS EPS growth PER P/NTA P/CF GDY Rec
FYE Price Value (sen) (%) (x) (x) (x) (%)
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Ta Ann Dec 5.30 6.45 44.7 56.3 50.3 25.9 11.9 9.4 1.6 7.9 5.6 OP
Evergreen Dec 1.55 2.30 21.0 23.0 27.0 9.4 7.4 6.7 1.1 6.7 6.9 OP
WTKH Dec 1.14 1.45 10.4 14.3 +>100 37.3 11.0 8.0 0.6 n.m 5.3 OP
Jaya Tiasa^ Apr 3.12 3.05 27.7 55.5 +>100 +>100 11.3 5.6 0.8 7.7 0.0 UP
Sector Avg 86.5 39.8 10.1 7.2
^ FY10-11 valuations refer to those of FY11-FY12

April 10 housing starts marginally improved, (+0.6% yoy to 66,568 units), Chart 1. Japan Housing Starts
the first in 17 months, which signifies that Japans housing recovery may start '000 units
130

gaining pace soon. This is supported by the number of building permits issued,
120
110

which has been increasing for the past six months.

100
90
80

70
June tropical log prices are up due to supply constraint. According to JLR, 60
50
there is still strong demand for selective logs from India and China, which is 40
30
leading to an upward movement in log prices. Coupled with tight log supply in 20
10
Malaysia due to adverse weather conditions, which led to lower logging activities, 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
log export prices are up to US$200/cum for meranti regular FOB, which is up 2005 2006 2007 2008 2009 2010

US$2-3/cum (1-2%) from May 10. This is also up by about 10% from the YTD low
of about US$180/cum.

Selling prices for plywood firming up. Average selling prices for plywood have Chart 2 Japan Total Plywood
Imports
also started to firm up since Apr 10, after a 10-15% increase from YTD-low.
However, industry numbers are more bullish, reporting an average of 15-22% '000m3

increase from the YTD-low, which we believe was mainly a cost-push factor. 500

Together with more predictable tropical plywood demand from gradually 400

improving housing activities coupled with low inventory levels in Japan of about 300

one month (domestic plywood inventory in Japan dropped 26% yoy in YTD-Apr 200

10), we expect plywood prices to stabilise at current levels, and we believe that
100

0
current price levels of plywood products are more reflective of the current demand
Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10
and supply situation. This in turn would help timber players start recording some
profits / minimise their losses in their plywood division CY10.

Forecasts. Increased net dividend payout assumption for Ta Ann to 50% p.a. for
FY10-12 from 11-15% p.a. previously, following managements guidance.
Together with some minor updates to our debt assumptions, our earnings
forecasts for Ta Ann are reduced by 2.8-3.1% p.a. for FY10-12. Our forecasts for
the other timber companies are unchanged.

Risks: 1) timber demand improving significantly, resulting in higher-than-

expected timber prices; 2) a sharper-than-expected recovery in Japans economy;
3) reduced competition from other major plywood exporting countries (i.e.
Indonesia and China) due to plant closure etc.; and 4) significant reductions in
glue and logistics costs.

Maintaining our Neutral view on the timber sector with an upside bias,
not withstanding any reviews of our plantation earnings assumptions. Our Hoe Lee Leng
(603) 92802239
top picks are Ta Ann (OP; FV = RM6.45) and Evergreen (OP; FV = RM2.35).
hoe.lee.leng@rhb.com.my
We also have an Outperform recommendation on WTK (OP; FV = RM1.45) and an
Underperform recommendation on Jaya Tiasa (UP; FV = RM3.05).

Please read important disclosures at the end of this report. Page 1 of 4

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 21 June 2010

Japan Lumber Report (JLR)

Key highlights: 1) Aprils housing starts improved yoy in Japan; 2) June tropical log prices up due to supply
constraint; and 3) firming up of plywood prices in 2Q10.

Aprils housing starts marginally improved. Latest Apr 10 Japan housing starts saw a marginal
improvement (+0.6% yoy to 66,568 units), the first in 17 months, which signifies that Japans housing
recovery may start gaining pace soon. This is supported by the number of building permits issued, which has
been increasing for the past six months. Apr 10 permits were about 11% up yoy. Going forward, we expect
housing starts to improve further on a gradual basis yoy, mainly due to the low base effect.

June tropical log prices are up due to supply constraint. According to JLR, there is still strong demand
for selective logs from India and China, which is leading to an upward movement in log prices. Coupled with
tight log supply in Malaysia due to adverse weather conditions, which led to lower logging activities, log export
prices are now at US$200/cum for meranti regular FOB, which is up US$2-3/cum (or 1-2%) from May 10.
This is also up about 10% from the YTD low of about US$180/cum. We understand that log inventories in
Japan plywood mills are also currently at the lower end, and as such, some trading houses have been
receiving offers of up to US$220/cum for meranti regular FOB. These selling prices for logs are higher than our
assumption of US$180-185/cum levels for 2010. However, while we prefer to maintain our assumptions for
now to remain conservative, we highlight that there could be potential upside for the logging division if prices
remain at current levels for the rest of the year.

Selling prices for plywood firming up. According to JLR, average selling prices for plywood have also
started to firm up since Apr 10, after a 10-15% increase from the YTD-low. However, industry sources are
more bullish, reporting an average of 15-22% increase from the YTD-low. We note that the industry numbers
are currently in line with our forecasts. We believe that the price increases were mainly a cost-push factor,
caused by the: 1) limited supply of tropical plywood in Japan, as Japanese manufacturers continued cutting
production in the midst of rising input costs; and 2) rising input costs for Malaysia plywood manufacturers
such as log, glue and logistics cost. We understand that most of the timber players have cleared their
outstanding plywood inventories in 1QCY10, when demand started to pick up due to restocking activities.
Together with more predictable tropical plywood demand from gradually improving housing activities coupled
with low inventory levels in Japan of about one month (domestic plywood inventory in Japan dropped 26% yoy
in YTD-Apr 10), we expect plywood prices to stabilise at current levels, as we believe that current price levels
of plywood products are more reflective of the current demand and supply situation. This in turn would help
timber players start recording some profits / minimise their losses in their plywood division in CY10.

Risks

Upside risk. The risks include: 1) timber demand improving significantly, resulting in higher-than-expected
timber prices; 2) a sharper-than-expected recovery in Japans economy; 3) reduced competition from other
major plywood exporting countries (i.e. Indonesia and China) due to plant closure etc.; and 4) significant
reductions in glue and logistics costs.

Downside risk. The risks include: 1) longer-than-expected period to recovery for the timber sector; and 2)
price discounting from neighbouring countries with lower cost of production, resulting in lower exports from
Malaysia to its major export markets.

Forecasts

Increased net dividend payout assumption for Ta Ann. Given the more positive outlook in the timber
sector, we understand that Ta Ann will now be resuming its minimum historical net dividend payout of 50%
from FY10 onwards from only 11% in FY09. As such, we have increased our net dividend payout assumptions
for Ta Ann to 50% p.a. for FY10-12 from 11-15% p.a. previously. Together with some minor updates to our
debt assumptions, our earnings forecasts for Ta Ann are reduced by 2.8-3.1% p.a. for FY10-12. Our forecasts
for the other timber companies are unchanged.

Page 2 of 4

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 21 June 2010

Valuations and recommendation

We are maintaining our Neutral view on the timber sector with an upside bias, not withstanding
any reviews of our plantation earnings assumptions. While we maintain our Neutral view on the timber
sector, we would like to highlight that there is an upside bias, not withstanding any reviews of our plantation
earnings assumptions. This is because we believe that: 1) inventory levels of timber players have dropped
following the clearance of inventory in 1Q10, which means that the current price levels of plywood products
are more reflective of the current demand and supply situation, which we expect to stabilise for the
remaining of the year; and 2) supply constraints from the cessation of some plywood mills locally and
internationally, which would imply that we may not see an oversupply situation in the near term. However,
there could still be a risk of a longer-than-expected recovery for the timber sector, following still weak Japan
housing start numbers.

Ta Ann & Evergreen - attractive dividend yield + earnings growth. Our top picks are Ta Ann (OP; FV =
RM6.45) and Evergreen (OP; FV = RM2.35). We like Ta Ann as earnings would be driven by its plantation
division, while any further upside to the plywood division would further boost its earnings. Furthermore, Ta
Ann has committed once again, to its historical net dividend payout of 50%, which would bring net dividend
yields to attractive levels of 4.5-7.0% in FY10-12. We also like Evergreen as we expect stronger earnings
ahead as a result of higher sales volume and average selling prices. The commissioning of its Indonesia
operations would provide further upside to FY10 earnings. Furthermore, we expect Evergreen to pay out 40-
45% of its net profit in FY10-11, which translates to attractive net dividend yields of 6-7%. We also have an
Outperform recommendation on WTK (OP; FV = RM1.55) and an Underperform recommendation on Jaya
Tiasa (UP; FV = RM3.05).

Table 2. Valuation Bases

Company Fair Value Valuation Recommendation
(RM/share) Methodology

Ta Ann 6.45 Target PER of 14x CY10 earnings for the timber division OP
and 14x CY10 earnings for the plantation division

WTKH 1.45 Target PER of 14x CY10 earnings OP

JTiasa 3.05 Target PER of 14x CY10 earnings for the timber division UP
and 14x CY10 earnings for the plantation division

Evergreen 2.35 Target PER of 11x CY10 earnings OP

Share price correlation with plywood prices highest for Ta Ann. We have plotted the correlation
between average plywood prices and share prices of timber players (i.e. Ta Ann, WTK and Jaya Tiasa) for the
past 6 years (from Jul 03- Mar 10). From a graphical perspective, we believe that Ta Anns share price
generally outperforms on the upside when plywood prices are rising, and in line with the market when
plywood prices are on the downtrend (see Chart 3). Meanwhile, for both WTK and Jaya Tiasa, their share
prices generally perform in line with plywood prices, except when plywood prices are on a downtrend, which
would see their share prices generally underperform. From a statistical perspective, we conclude that on
average, Ta Ann has the highest share price correlation with plywood prices (about 60%); as compared to
WTK (about 39%) and Jaya Tiasa (about 14%).

Page 3 of 4

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 21 June 2010

Chart 3: Correlation Between Average Plywood Prices And Share Prices Of Timber Players

400%

350% Ta Ann
WTK
300% Jaya Tiasa
Average plywood prices

250%

200%

150%

100%

50%

0%
3

0
3

9
-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-1

-1
0

0
l-

l-

l-

l-

l-

l-

l-
n

n
pr

pr

pr

pr

pr

pr

pr
ct

ct

ct

ct

ct

ct

ct
Ju

Ju

Ju

Ju

Ju

Ju

Ju
Ja

Ja

Ja

Ja

Ja

Ja

Ja
O

O
A

A
Source: Japan Lumber Report, Bloomberg, RHBRI

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Stock Ratings

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Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
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