12/05/2008 (The Star Online) - THE CEO INTERVIEW - A good diversification programme had enabled Ta Ann Holdings Bhd to weather the downturn in the timber sector in the last 15-month.

The track record of the country's largest integrated timber player was challenged last year when its core timber business was impacted by persistent weakness in plywood prices.
 
Its share price declined by over 40% from its peak at RM11.90 in February last year.

However, the group's oil palm division - thanks to high crude palm oil (CPO) prices - has provided the buffer to its earnings and revenue last year, thus offsetting the lower contribution from its timber business.

Some quarters considered Ta Ann's decision to operate both timber and oil palm as a risky combination, given the volatile nature of the businesses.

However, group managing director Datuk Wong Kuo Hea is banking on the two commodities to provide the winning streak for years ahead.

To him, having a portfolio of mixed businesses augured well for Ta Ann, which was constantly on the lookout to improve its sources of revenue.

“By concentrating on the resources business that we know well, we believe there will be limitless opportunities for growth,” Wong added.

In fact, the group's timely diversification into oil palm had provided a sound buffer to its high dependence on the traditional logging, plywood and saw milling operations.

Wong expects 2008 to be an equally challenging year for Ta Ann. This is despite the rebound in current plywood prices since February, and CPO prices continuing to trade above RM3,000 per tonne.

“We believe the current revised upward pricing can be sustained but the take-off will not be like a jet plane. It will be more like a Fokker Friendship,” he said.

Benefiting from higher timber prices
Merrill Lynch in its recent report said Ta Ann stood to benefit directly from the increase in timber prices. Its share price has a high correlation of 82% to plywood prices and is sensitive to the ringgit-US dollar exchange rate.

For every 1% increase in plywood price, the brokerage expects Ta Ann's earnings to increase by 2.6% and its price target to be boosted by 10 to 20 sen.

According to Wong, the current pick-up in plywood prices is attributed to lower stocks and improvement in the housing construction activities in Japan.

“However, certain products will only have their price pick up a bit later as demand has a lag time of six to eight months.”

In the meantime, the costs of raw materials such as logs, glue and paint are also going up.

Game plan
According to Wong, Ta Ann will be undertaking overseas expansion for its downstream plywood products, especially in high demand growth countries.

He said the group's maiden rotary peeled veneer mill in Huon, Tasmania, began operations in mid-2007, producing about 85,000 cuc metres of eucalyptus veneer.

“We are also scheduled to complete a second veneer mill in Smithton by the fourth quarter of this year,” he added.

This year, Wong said, the group made an inroad into China via the setting up of a US$15mil plywood mill.

“The completion of the mill in Yang Zhou, China, will enable Ta Ann to have two integrated supply chains for plywood production serving Japan and China,” he said.

The group's Sibu mill in Sarawak will cater to the Japanese market by supplying concrete panels, coated concrete panels and laminated veneer lumber.

The first Tasmania mill will provide premium environmentally friendly timber products to Japan, while the second mill is targeted to supply raw materials to the China plywood mill to gain entry into the emerging Chinese market.

“These strategies will enable us to serve long-term clients in Japan and tap into China without putting a strain on processing capacity or input requirements,” Wong said.

On the local front, Ta Ann is allocating RM115mil to plant another 6,000ha with oil palm this year. Last year, the oil palm division increased its planted hectarage by 3,856ha to 18,211ha and mature area to 6,991ha.

He also said the construction of its RM36mil biomass power plant has been completed and is scheduled to be commissioned this month.

“Its capacity of 11.4 megawatts per hour is more than sufficient to power our plywood and sawmill at Sg Bidut, Sibu.”

Another RM32mil is budgeted for planting 5,000ha of trees this year under Ta Ann's reforestation division.

Wong said that the group would continue to expand in accordance to Ta Ann's vision.

“We have recently announced the venture into China to establish an additional plywood plant that aims at making higher value added products.

“As for oil palm plantation, we have increased our land bank by 15,000ha to about 55,000ha and are in the process of negotiating for acquiring more land bank for cultivating oil palm. However, it will be confined to within Sarawak.”

Analysts' top timber play
With plywood prices on the mend, analysts are upgrading the Asian timber sector to “overweight” from “neutral.”

Credit Suisse's industry checks showed that most operators were seeing a slight pick-up of 2% to 5% in indicative export plywood prices.

“We expect this good news to trigger a re-rating of the timber sector since share prices of timber related stocks have collapsed,” the brokerage said.

“Our new target price offer for Ta Ann has a 48% upside potential,” it added.

Merrill Lynch, meanwhile, has upgraded Ta Ann to a “buy” with a targeted share price of RM10.15.

While optimistic on the outlook for plywood prices, the brokerage said: “We believe that timber companies under our coverage are unlikely to be spared from a downturn in prices as their earnings are highly correlated to plywood prices.”

For every 1% decline in plywood prices, earnings for most of the timber companies would fall by 3%, based on its sensitivity analysis, it said.

Other negative factors include the slowdown in Japan's economy, currency appreciation affecting earnings, logging concession renewal and weather conditions.

On the ringgit, Merrill Lynch said the local currency appreciation would likely weaken ringgit-denominated receipts, thus reducing revenues.

As costs are denominated in ringgit, timber companies will earn lower revenues when the currency appreciates.

The ringgit, which has strengthened by 3.3% year-to-date, , looks set to appreciate to RM3 per dollar this year.

Ta Ann shares closed at RM7.65 on Bursa Malaysia last Friday, down 15 sen from a day earlier.