jpmorgan: WTK Holdings Berhad

WTK Holdings Berhad : Trend in plywood / log prices reported by Japan Lumber Report is in line with expectations - ALERT


Japan Lumber Report reported 1Q08 plywood / log prices. Average 1Q08 plywood prices came in 2-6% higher Q/Q but still 24-27% lower Y/Y against a 2% Q/Q decline and 8% Y/Y decline in log prices. 1Q08 plywood prices were mainly driven up by higher prices in March 2008. The 8-13% M/M increase in March prices was largely expected – that plywood prices have bottomed, as highlighted in our note 'Bottomed but no sign of immediate rebound in sight' dated 20th March 2008. Our checks with timber companies have revealed that despite weak Jan/Feb prices, prices showed recovery in March with Japan trading houses entering into contracts at higher volumes.

However, we see no near-term catalyst for now and hence, expect the stock to remain range-bound. The line of sight is unclear for investors over the next few months: 1) Japan's GDP growth could be dampened by a US recession. Note that JPMorgan recently lowered the 2008 GDP forecast for Japan to 1.3% from 1.7%. 2) Housing starts may not stage a strong rebound in 2008 given weak condominium sales in Japan at the moment.

Maintain OW on WTK as we believe that the downside for the stock is limited as the company is able to absorb any short term negative cash flows given its strong balance sheet position. Moreover, the stock is currently trading at a 0.8x FY08E P/B. Our Dec-08 PT of M$2.60 is based on a 1.1x FY08E P/B, which is the mid range of its historical trading range since 1998 (trading range 0.6x-2.4x). Key risk to our PT is a prolonged and deeper slowdown in the US affecting the Japanese economy.