KUCHING: Jaya Tiasa Holdings Bhd (Jaya Tiasa) is expected to spend RM230 million in capital expenditure (capex) for financial year 2012 (FY12), mainly financed through its strong operating cashflow and bank borrowings.
The capex was mainly for oil palm planting (RM90 million), construction of new crude palm oil (CPO) mill (RM70 million), logging machinery (RM50 million) and forest plantation (RM20 million).
According to RHB Research Institute Sdn Bhd (RHB Research), Jaya Tiasa recorded an average selling price (ASP) for its logs of RM741 per cubic metre (m3) in the first quarter of FY12 (1QFY04/12), an increase of 3.3 per cent quarter-on-quarter.
The high log prices were mainly due to acute shortage in log supply during the early part of 2011, as production was hampered by extremely wet weather condition in Sarawak. Log prices had since eased as log production volume normalised over the past few months.
“Due to lower log prices (we estimate its log prices to average about US$220/m3), we therefore expect Jaya Tiasa to report lower earnings from its log division in its upcoming 2QFY04/12 quarterly results,” RHB Research stated in its research report yesterday.
Jaya Tiasa’s strategy was to maximise its log exports quota first (50 per cent currently) before using its own harvested logs for downstream plywood manufacturing, as margins for logs were higher now compared with plywood. Hence, this was why the capacity utilisation rate of its plywood division remained low at only between 50 per cent and 60 per cent.

“The company typically produces lower-grade general plywood, but there had been a shift to produce more higher-grade plywood recently to take advantage of the higher demand from Japan after the March earthquake disaster. This is evidenced by the sharp 31 per cent increase in Jaya Tiasa’s plywood ASP to RM2,074/m3 in 1QFY04/12,” it stated.

With that, Jaya Tiasa was likely to continue to produce more higher-grade plywood in the near term, as current prices for general plywood had been rather weak due to the oversupply issue, while prices for higher-grade plywood had been holding up quite well.

The group also pointed out that its fresh fruit bunch (FFB) production volme was set to grow significantly by 30 per cent to 45 per cent per annum over the next few years as more oil palm trees come into maturity. Hence, this would drive Jaya Tiasa’s earnings growth going forward, despite the relatively flat CPO price assumptions of RM3,100 per metric tonne (MT) in 2012 and RM2,900/MT in 2013.

“Given the new FFB production targets by management, we therefore revise upwards our FY04/12-14 FFB production forecasts between two and four per cent. Our FFB production forecasts are usually higher than management’s targets, as Jaya Tiasa has always been conservative in guiding its FFB production target,” said the research firm.

As at July 31, 2011, Jaya Tiasa had about 15.5 million treasury shares, or about 5.5 per cent of its share base. It had been reluctant to sell its treasury shares to the market, as management deemed the share price was too low and did not truly reflect the earnings growth potential of the company.

RHB Research further pointed out that Jaya Tiasa’s management seemed to have warmed up to the idea of selling its treasury shares, although it stressed that it would only do it at the right time and at the right price. Jaya Tiasa hinted that it might sell the treasury shares in the future in order to raise funds for potential landbank acquisitions to reduce its gearing.

“Overall, we believe a sale of the treasury shares to the market will be beneficial for Jaya Tiasa as this will help to improve the trading liquidity of its shares,” said the research firm. Going forward, RHB Research continued to favour Jaya Tiasa as there would be a significant boost to its earnings from plantation due to increasing FFB production volume and favourable CPO prices. This could provide ‘earnings comfort’ to investors and also help to cushion the more volatile earnings from timber.

Based on target price earnings ratio of eight times CY12 earnings for the timber division and 12 times CY12 earnings for the plantation division, RHB Research pegged its target price to RM7.28 per share, from RM6.71 per share previously, at a 10 per cent discount to sum-of-part-based fair value