IN AN ATTEMPT to curb illegal logging in Sarawak, Chief Minister Tan Sri Adenan Satem has frozen the issuance of new logging licences and tightened licence renewals.

Analysts say the crackdown on illegal logging bodes well for timber companies in Sarawak, of which 84% is covered by rainforest.

The state’s move is expected to cause a drop in timber supply, resulting in an increase in price and hence, higher profits for timber firms.

In addition, these companies will benefit from a weak ringgit as their products are sold in US dollars.

Among the listed Sarawak-based timber firms are Jaya Tiasa Holdings Bhd, Subur Tiasa Holdings Bhd, W T K Holdings Bhd and Ta Ann Holdings Bhd.

An industry executive says timber companies in the state may not see an immediate impact from the tighter rules.

“At present, there is no impact in terms of operations because the state government is not withdrawing licences, but supply may fluctuate if there is no licence renewal and one-off concession,” he says.

He expects the price of meranti regular log to hover around US$240 per cu m. Last year’s average price was between US$250 and US$260.

The meranti regular is used as a pricing benchmark for logs as it is a dominant species in Sarawak.

CIMB Research analyst Saw Xiao Jun says the price of meranti regular will be driven by an increase in demand from India and Japan for construction, as well as lower supply of logs. “I expect the price to increase US$10 to US$15 per cu m.

“With a stronger US dollar, the impact on earnings will be significant, assuming that timber prices in US dollars remain unchanged.”

He says for the four companies, 40% to 50% of harvested timber can be exported, and India is the largest importer of Sarawak logs. The rest of the timber is mostly used to make plywood for export to Japan, which is the biggest buyer.

To recap, the state government recently froze the issuance of new logging licences and will only consider renewing logging permits based on merit.

The halt in licensing and stricter licence renewals apply to logging on state land and permanent forest estates. Licences for one-off clearing work, or “occupation tickets”, have also been terminated.

According to reports, the state government has issued 572 timber licences, of which 204 are for logging on state land and permanent forest estates and 155 for one-off clearing work. The rest are for harvesting mangrove wood and belian (a high-value, durable tropical wood).

According to the annual reports of the four timber companies, Jaya Tiasa has a 92,000 cu m monthly extraction quota from a 713,211ha tract. Ta Ann has a total concession area of 400,030ha and a harvesting quota of 500,000 cu m a month. WTK has a harvesting quota of 600,000 cu m per month on a 385,000ha tract.

Subur Tiasa, however, did not provide any details.

According to the industry executive, for the first 10 months of last year, Sarawak harvested 7.2 million cu m of timber.

CIMB’s Saw says in 2013, the state harvested 8.2 million cu m of logs despite having bad weather for a certain period. Therefore, he expects production to rise in 2014.

“But for following years, we’ll see a decline due to the depletion of resources. Also, replanting has been quite slow,” he adds.

RHB Research analyst Hoe Lee Leng says the saving grace for the timber industry is the foreign exchange rate.

“While weaker consumer spending in Japan — the result of a weakening yen against the US dollar — has affected plywood sales volume, this is more than offset by the strengthening of the US dollar against the ringgit,” she says.

She adds that with the assumption of a ringgit exchange rate of 3.15 to 3.20 to the greenback, the research house estimates that every 10 sen per US dollar change in the rate affects timber companies’ earnings by 10% to 17% per annum.

Jaya Tiasa posted a higher net profit of RM23 million for 1QFY2015 ended Sept 30, 2014, compared with RM19.11 million previously. Revenue also rose to RM261.86 million from RM245.46 million.

Similarly, Ta Ann’s net profit for 3QFY2014 ended Sept 30, 2014, was higher at RM43.6 million compared with RM33.84 million previously. Revenue increased to RM284.7 million from RM216.81 million.

However, Subur Tiasa and WTK saw a dip in their earnings. Subur Tiasa posted a net profit of RM5.68 million for its 1QFY2015 ended Oct 31, 2014, compared with RM9.13 million a year earlier. Revenue, however, was higher at RM216.26 million, compared with RM214.43 million previously.

WTK registered a net profit of RM9.7 million for its 3QFY2014 ended Sept 30, 2014, compared with RM13.94 million a year before. Revenue came in at RM155.57 million against RM159.18 million previously.

This article first appeared in The Edge Malaysia Weekly, on February 2 - 8 , 2015.

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