Sunday, June 5, 2011

RHB Research: Lingui turning over a new leaf

Lingui Developments Bhd
(May 19, RM1.90)
Initiate coverage at RM1.87 with outperform call and fair value of RM2.71
: Lingui has annual log production volume of about one million cu m and an estimated annual plywood and veneer production capacity of about 600,000 cu m. Lingui also owns 35,000ha of forest plantation in New Zealand and a 38.33% stake in Glenealy Plantations (Malaya) Bhd.

Similar to other timber players, Lingui's log export selling prices for April have risen to US$280 (RM845.60) to US$300 per cu m. However, Lingui cautioned that as the spike in log prices was due to a short-term log shortage, it is not likely to be sustainable and believes that log prices will decline when production normalises.

Management said its logging operations have not been affected by the flooding from the Bakun dam impoundment as its forest concessions are not located near that area.

Due to weak softwood prices, Lingui's New Zealand forest plantation operation has been in the red, which has dragged down the performance of the group in the past. Given the current rising prices of radiata pine log, however, Lingui's New Zealand operation will likely see a significant turnaround in the next few years together with the gradual ramp-up in harvesting volume.

According to the latest Japan Lumber report, radiata pine log prices are now at US$170 per cu m C&F (estimated at about US$120 to US$130 per cu m FOB). This compares with the production cost (including depletion expenses) of US$90 to US$100 per cu m.

For 9MFY11, average selling price (ASP) achieved was about US$500 per cu m, while the unit cost of production was slightly higher at US$510 per cu m. This led to losses in Lingui's plywood division. Although plywood prices have been improving in the past nine months, this has been offset by the strengthening of the ringgit against the US dollar.

Nevertheless, we expect Lingui's plywood division to turn around to profitability from 4QFY11 onwards due to the surge in plywood prices after the Japanese earthquake, which will more than offset the increase in production costs.

Risks include: (i) a drop in timber and CPO prices; (ii) lower than expected improvement in Japan's housing starts; (iii) bad weather conditions; and (iv) significant increase in crude oil-related glue and logistics costs.

Our sum-of-parts-derived fair value for Lingui is RM2.71. We valued Lingui's timber business based on a target price-earnings ratio (PER) of 12 times FY12 timber earnings and its 38.3% stake in Glenealy based on current market value.

Despite the 40% run-up in share price since March, following the Japan earthquake, valuations continue to be attractive, vis-'' vis its peers, which are trading at an average CY11 PER of 9.5 times. As such, we initiate coverage on Lingui with an 'outperform' call. ' RHB Research, May 19

This article appeared in The Edge Financial Daily, May 20, 2011.

RHB lingui reseach report can download here

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