This is the final part of the “Timber
related stocks initial coverage” series.
In part I (Read
more here), an overview of Malaysia timber export performance was
presented. While in part II (Read
more here), wooden furniture companies that have high exposure to US market
were selected for analysis.
In this
final part, the analysis will focus on companies that involve in both upstream
and downstream timber business as these companies provide a good proxy for
overall timber market.
There are many timber products and
concession companies in Malaysia but only four integrated timber companies
listed on Bursa Malaysia. They are
JTIASA, SUBUR, TAANN and WTK. As usual,
a quick ranking using AlphaFactor for these companies are presented in Table 1.
Based on Table 1 data, TAANN and WTK’s
scores are pretty decent. Thus, the
subsequent analysis will focus on these two companies.
Table 1 (as at 28-Dec-2016)
|
Stocks
|
Momentum
|
Valuation
|
Growth
|
Efficiency
|
Quality
|
Average
|
|
JTIASA
|
1
|
5
|
2
|
4
|
2
|
2.8
|
|
SUBUR
|
3
|
2
|
4
|
4
|
4
|
3.4
|
|
TAANN
|
5
|
3
|
2
|
2
|
1
|
2.6
|
|
WTK
|
3
|
1
|
3
|
3
|
2
|
2.4
|
As part of the standard procedure, both
companies are scanned for any potential financial statement anomaly using
Beneish M-Score (Read more here). Table
2 is the Beneish M Score results. Both
companies’ scores are good.
Table 2
|
Beneish M-Score
|
2015
|
2014
|
Benchmark (lower better)
|
|
TAANN
|
-2.368119291
|
-2.983416968
|
< -1.78
|
|
WTK
|
-2.03312734
|
-3.014439885
|
< -1.78
|
The valuation method for these integrated
timber companies will be different from the valuation approach applied in the
part II analysis of this timber stocks coverage series. Both TAANN and WTK have more than 30 years
track records and both also paid dividend for the past 10 years (See Chart 1
and Chart 2). DDM method may be more
appropriate to value these companies.
Chart 1
Chart 2
The most important factor for the DDM
valuation is the g (growth rate) assumption.
One of the popular textbook approach is using the RR*ROE (Retention Rate
* Return On Equity) formula while another approach is using the historical
dividend growth rate. In this analysis,
a proxy based on world timber export market growth will be used.
Chart 3 is the world timber export historical
market value ranging from 1990 to 2014.
These data were taken from International Tropical Timber
Organization (ITTO) statistics database.
In 1990, the export market was about US$ 60 billion then gradually
increased to US$ 140 billion in 2014. As
depicted in the chart, the growth was quite volatile. The average growth rate over the past 25
years was around 3.5%. Based on the
assumption that timber market will continue to grow at this pace, the long term
growth projection for timber stocks like TAANN and WTK will be 3.5% per annum.
Chart 3
Table 3 and Table 4 are the fair value for
TAANN and WTK based on DDM method with various k (required rate of return).
Table 3.
TAANN DDM value
|
k
|
g
|
DDM
value (RM)
|
|
5.0%
|
3.5%
|
6.00
|
|
6.0%
|
3.5%
|
3.60
|
|
7.0%
|
3.5%
|
2.57
|
|
8.0%
|
3.5%
|
2.00
|
|
9.0%
|
3.5%
|
1.64
|
|
10.0%
|
3.5%
|
1.38
|
Table 4.
WTK DDM value
|
k
|
g
|
DDM
value (RM)
|
|
5.0%
|
3.5%
|
1.33
|
|
6.0%
|
3.5%
|
0.80
|
|
7.0%
|
3.5%
|
0.57
|
|
8.0%
|
3.5%
|
0.44
|
|
9.0%
|
3.5%
|
0.36
|
|
10.0%
|
3.5%
|
0.31
|
The closing prices for TAANN and WTK on
28-Dec-2016 were RM3.94 and RM0.99 respectively. For an investor who is looking for a 5%
return per annum, both TAANN and WTK prices are attractive. But for an investor who is looking for 7%
return per annum, both TAANN and WTK prices are not cheap at this moment based
on DDM method.
Another common method to estimate the
required rate of return is using CAPM (Capital
Asset Pricing Model).
k = R(f) + β[R(m) – R(f)]
where,
k = required rate of return
R(f) = risk free rate
β = beta, sensitivity of price movement
between stock and market
R(m) = market risk
Table 5.
Required rate of return for TAANN and WTK (data source www.reuters.com and www.ftse.com )
|
|
R(f)
|
β
|
R(m)*
|
k
|
|
TAANN
|
3.2%
|
0.37
|
10%
|
5.7%
|
|
WTK
|
3.2%
|
1.61
|
10%
|
14.2%
|
* Blended 3Y volatility of KLCI and EMAS
Index
Based on the required rate of return in
Table 5, the fair value for TAANN and WTK are RM 4.1 and RM 0.2 respectively.
The valuation for TAANN seems decent when
compare to the 28-Dec-2016 closing price at RM3.94 but WTK seems over-valued
when compare to the closing price of RM0.99.
A closer look on the Balance Sheet of WTK
one can find that its book value per share is RM2.74 while the cash per share is
RM0.84. As such, the market price is
underpinned by its cash and asset position.
Disclaimer: The above analysis does not imply any buy or sell recommendation. The author disclaims all liabilities arising from any use of the information contained in this article.
Disclosure: The author may have interest in the stocks of the companies in this article.
