Players See Demand Coming From Reconstruction at The Start of Next Year

KUALA LUMPUR: It has been more than six months since the earthquake and tsunami in Japan in March. The market has been anticipating increasing exports of timber products to Japan as the country rebuilds itself. It was reported that Japan would set aside ¥9 trillion (RM375 billion) in its third supplementary budget for reconstruction of the affected areas. While the plywood price has increased 12% to an average of US$650 (RM2, 035) per cu m since the earthquake, players are only expected to see demand coming from reconstruction at the start of next year. "We will only see demand for reconstruction coming in next year once the budget is approved by the government. This will be spread over the next five to 10 years, " said a Ta Ann Holdings Bhd spokesman. Ta Ann exports about 95% of its plywood to Japan. The spokesman said plywood prices are expected to remain strong for the rest of the year, supported by stable Japanese housing starts. The latest statistics show that Japan's housing starts have risen 14% year-on-year in August. On an annualised basis, they have risen 3.5% to 841, 401 units from 2010. The spokesman noted, however, that a recession next year could put a dent in global demand for timber. The volume of timber exports is expected to rise 14% this year compared with last year. "This is because Japan is the largest importer of plywood. The country's import volume for plywood has a correlation with its housing starts data. When the world goes into recession, Japan's economy will be affected as it is export-oriented and housing starts will fall, " he said. His view is shared by an analyst with RHB Research. He said there is increased uncertainty in housing starts recovery in Japan as the risk of a double dip recession appears more imminent next year. A recent report by RHB Research said Japan's housing starts could be flattish in the next two years, sustained mainly by reconstruction of the disaster areas. "Given our view that the growth in Japan housing starts will be relatively flat over the next two years, we believe that plywood prices will now likely turn out to be lower than we originally estimated. "Hence, we cut our average plywood price assumptions for the timber companies under our coverage by US$30 to US$40 per cu m for FY12 and FY13, " it said. RHB Research said log prices are expected to remain stable between US$220 and US$240 per cu m, as log production is traditionally lower in 4Q, before weakening by another US$20 per cu m next year due to the poor global economic outlook. "Nevertheless, our 2012 average log price forecast of US$220 to US$230 per cu m is still above the historical average of US$180 per cu m, given the still relatively robust demand from India and China, " it said. While it has a "neutral" view on the industry, it remains positive on Ta Ann and Jaya Tiasa Holdings Bhd as they have significant oil palm hectarage comparable to mid-sized plantation companies. "We have seen their fresh fruit bunch (FFB) [production] increase significantly and it will continue to contribute positively to its earnings going forward, " said the analyst from RHB Research. The analyst said that while exports are expected to slow down in the second half of the year, the industry is expected to see timber export volumes rise 14% to 15% in 2011 compared with last year. Last year, the supply of timber products was disrupted by unusually wet weather in Borneo. The Ta Ann spokesman noted that the supply of logs this year has normalised due to improved weather conditions. For 1HFY11 ended June 30, Ta Ann's net profit jumped to RM77.3 million from RM15.47 million a year earlier due to higher selling prices for timber, timber products and crude palm oil. Similarly, Jaya Tiasa saw its net profit for 1QFY12 ended July 31 more than double to RM55.9 million from RM22.5 million a year earlier. Among the timber stocks under coverage, RHB Research has "outperform" calls for Ta Ann and Jaya Tiasa with target prices of RM5.49 and RM6.12 respectively. Ta Ann closed unchanged last Friday at RM4.70 and Jaya Tiasa rose one sen to close at RM5.42. Source: theedgemalaysia.com