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 Kamar Nor Aini Bt Kamarul Zaman
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 The Star Online
 Time for timber

21/04/2008 (The Star Online) - THERE was renewed interest in the timber sector last week following a recent timber conference organised by the CIMB group.

Jaya Tiasa Holdings Bhd, Lingui Developments Bhd, Evergreen Fibreboard Bhd and Priceworth Wood Products Bhd, which made presentations at the conference, saw conspicuously more active trading in their shares, with modest gains in their prices.

Although some of these stocks have climbed from their lows last month after two foreign brokerages upgraded the timber sector, the stocks are still 40% to 50% below their 52-week highs.

The company executives, who made their presentations to fund managers at the conference, sketched a convincing case for a full recovery in log and plywood prices, which declined about 10% and 20% from a year ago respectively.

Beyond that, there is anticipation there would not only be a recovery but a full-blown boom, in line with record prices in both metal and agricultural commodities. While plywood prices were fairly firm a year ago, the industry has not seen a boom since 15 years ago.

The confidence in a price recovery is based on the V-shaped rebound in housing starts in Japan. The rebound came after new housing regulations, that had caused delays in construction, were amended. The bounce-back in housing starts was not inconceivable because the plunge in August last year was caused artificially, and not naturally triggered by a drop in demand.

Housing starts in Japan have been restored to about 1.2 million units a month early this year, compared with about 1.3 million units last year. That compares with just 720,000 units at the trough of the decline last year.

If the recovery trend continues, it's only logical that plywood prices would recover, although at the initial phase, distributors there are drawing on their inventories rather than buying briskly.

There are several other factors that give the timber tycoons hope of a commodity boom namely:

·China's output and exports of plywood are expected to continue on a downtrend after the government reduced the export rebate to 5% from 20% at the end of last year. Higher shipping costs have also made its log imports more costly.

·Russia raised its export tax for logs to 25% on April 1 from 20%. More importantly, that will be increased to 80% on Jan 1 next year. That would have the effect of hitting exports with a large log. It will have an impact because Russia is the world's biggest exporter of logs, and China is its biggest importer.

·High economic growth in India and China will continue to increase their demand for all commodities, including plywood for housing and furniture.

The stars are aligned, so to speak, for the timber industry, and better, maybe even boom times are ahead.

Oil subsidy
It was not widely known that the controlled cooking oil price is subsidised by a cess (tax) paid by plantation companies to the Malaysian Palm Oil Board (MPOB). It is not known at all if there is a surplus or shortfall in this cess.

Plantation Industries and Commodities Minister Datuk Peter Chin shed some light on this last week when he said MPOB collected RM1.14bil from the palm oil industry in the 10 months to March 31, from which, RM750mil was paid to refiners and cooking oil manufacturers.

That leaves RM390mil that has not been paid to producers of cooking oil. It is not known if the palm oil producers have been “over-cessed” by that amount. MPOB should be transparent in its collection, and perhaps should stop collecting once it has a surplus for several months.

The cess is a sizeable sum for plantation companies, accounting for about 12% of their pre-tax profit based on last year's palm oil prices. No one, however, sympathises with them in view of their huge windfall profits. Notwithstanding that, a cess should be sufficient but should not be an opportunity for MPOB to retain hundreds of millions of ringgit. The cess will increase in size this year, due to record palm oil prices, faster than demand in the quantity of cooking oil.

There are other points to be considered. The cess is based on each tonne of fresh fruit bunches (FFB) produced rather than per tonne of crude palm oil (CPO). As oil extraction rates are lower from fruits of young palms, the cess is larger in percentage terms for plantations with large acreages of young palms than those with mostly palms at prime age. A cess based on per tonne of CPO will be more equitable.

The price of cooking oil is capped at RM2.50 a kg, probably ex-factory, as opposed to about RM5.00 if not subsidised. It was said that if the subsidy was withdrawn, it would cause hardship to consumers.

That could well be the last straw for the poor, over and above higher prices for a host of other food items. By itself, the market price of cooking oil would probably add less than RM20 for a big family that uses 5kg of oil.

That's far less than the effect of other subsidies such as petrol. Furthermore, the biggest beneficiary of the cooking oil subsidy would be the restaurant operators.

LFE under Alan
IJM Corp Bhd announced last week it received a letter of intent for a construction contract of RM840mil in Abu Dhabi in a joint venture with a little-known company also listed on Bursa Malaysia, LFE Corp Bhd.

LFE's share of the job through its 30:70 joint venture with IJM is substantial for the small company. Equally significant, it shows the recognition from IJM of LFE as a suitable contracting partner. It can be assumed that IJM would take on as a partner only someone that has a good track record in contracting in the Middle East.

Or rather, that recognition could be for Alan Rajendram who took over LFE, as well as Linear Corp Bhd, in 2006.

Rajendram, an accountant by training, also heads Stanton Technologies Sdn Bhd, which was approved for a listing on the Dubai Financial Exchange.

Both LFE and Linear have started to perform exceptionally well. LFE reported a net profit of RM5.6mil in its fourth quarter (Q4) ended Dec 31, 2007, mainly from the distribution of consumer electronics.

Linear produced a net profit of RM6.0mil or EPS of 8 sen for Q4 last year, with much of that from its solar panel division. It is not known if there is momentum in its earnings. If the Q4 earnings were maintained this year, it would make EPS of 32 sen, which is just below its share price of 33 sen on Friday. That would translate into a price/earnings ratio of 1 time.

The momentum of earnings for LFE and Linear remains to be seen, but Rajendram is becoming more conspicuous.

Malaysian Palm Oil Board ( MPOB ) Lot 6, SS6, Jalan Perbandaran, 47301 Kelana Jaya, Selangor Darul Ehsan, MALAYSIA.
Tel : 603 - 7802 2800 || Fax : 603 - 7803 3533