Timber sector in a tough spot

Like most commodities, the prices of timber had dropped quite significantly for the past three months, due to slower construction starts as well as weaker demand for furniture (see the table below).



The lower prices, coupled with higher operating costs (now, starting to retreat in the face of lower crude oil prices) had hit the bottom-line of many timber counters. The share prices of most timber companies have been sliding since peaking in March 2007. Recently, 2 big timber stocks- WTK & Lingui- made new 10 years' low! See 2 charts below.


Chart 1: WTK's monthly chart as at Nov 14, 2008 (source: Quickcharts)


Chart 2: Lingui's monthly chart as at Nov 14, 2008 (source: Quickcharts)

A closer look at the last 8 quarterly results shows that WTK has made a higher net profit of RM19.1 million for QE30/6/2008 due to increased turnover of RM226 million, brought on by higher sale volume & selling prices for both timber logs & plywood. The improvement was attributable to tighter supply in Indonesia & low inventory in Japan.



Despite higher turnover, Lingui reported a small pre-tax loss of RM8.0 million due to unrealized forex loss of RM10.0 million & write-off of capitalized interest from its New Zealand plantation of RM7.8 million.



Given the recent sharp drop in the prices of timber products, I expect both companies to report a poorer set of number for QE30/9/2008. Nevertheless, I believe that the share prices of timber stocks, such as WTK & Lingui, may have discounted most of the bad news out there. At their present depressed level, investors buying into these stocks may do very well in the long run since the risks-to-rewards ratio is now in your favor.