SUBUR ... Oct10

S & P Research

Results Review & Earnings Outlook
 For FY10 (Jul.), Subur Tiasa reported revenue of MYR679.9 mln (+13.6% YoY) and net profit of MYR30.1 mln (+68.7% YoY). The financial results were within our expectations.

 The YoY performance improvement was mainly due to: (i) higher export sales volume of round logs, and (ii) improved demand and average selling price of plywood. During FY10, its logging and plywood & particleboard manufacturing divisions recorded operating profit of MYR26.4 mln (+162.9% YoY) and MYR22.9 mln (+9.6% YoY) respectively.

 During 4QFY10, Subur Tiasa reported revenue of MYR169.1 mln (-10.7% YoY) and net profit of MYR6.3 mln (-28.3% YoY). The weaker YoY performance was due to lower sales of volume of plywood and particleboard. In addition, higher tax expense in 4QFY10 (certain expenses were not tax deductible) also lowered the group’s net profit.

 Looking forward, we expect demand for the group’s timber products to improve gradually in line with the economic growth in its key markets such as India, South Korea and Taiwan. Average selling prices of
round logs and plywood are expected to stay firm with supply constraints in the next few quarters. Contribution from the group’s maturing Mukah oil palm plantation is expected to provide another
stream of earnings in 2011.

 We maintain our FY11 earnings projection and introduce our FY12 earnings forecast of MYR43.5 mln.

Recommendation & Investment Risks
 We lower our recommendation on Subur Tiasa to Buy from Strong Buy with an unchanged 12-month target price of MYR2.60. Our downgrade is premised on the following: (i) its recent share price appreciation has lowered the potential upside to our 12-month target price, and (ii) uncertainty over the anti-dumping duties by South Korea on Malaysian plywood. Nevertheless, we still like Subur Tiasa for the well-diversified
markets for its timber products and its profit track record even in adverse times.

 We continue to derive our 12-month target price based on a priceearnings ratio (PER) valuation method. We have ascribed a PER of 13x (unchanged) to the group’s FY11 earnings (unchanged) and included our projected dividend to derive our 12-month target price. In determining the appropriate PER, we have considered the group’s historical PER trading range and its listed peers’ traded PERs. We have also factored in specific characteristics of Subur Tiasa such as diversified geographical markets, particleboard manufacturing and oil palm plantation

 Risks to our recommendation and target price include (i) weaker-thanexpected demand and average selling price of round logs, plywood and particleboard, (ii) higher-than-expected operating costs such as energy, transportation and glue, (iii) unfavorable foreign exchange rates (such as MYR appreciating against USD) may dampen its forward margins and earnings, and (iv) anti-dumping duties imposed on Malaysian plywood.