Leweko's platation sector

Target RM1.50
March 3, 2008

In Line
Results came in within our estimates. Full year FY07 turnover down 7.2% but net earnings dipped more significantly by 26.8% compared to last year. Weaker performance in 2007 was due to poor export prices for downstream timber products as well as the strengthening of the Ringgit. The company’s exposure to the palm oil segment prevented earnings from a further decline. Although management has seen some pick up in prices and volume from Europe, we think sufficient recovery is crucial to offset the impact of rising fuel and consumables prices and also the continued weakening US$. We largely maintain our FY08-09 estimates. Applying a 9x PE, this derives our fair value of RM1.50. Although this suggests an upside of 12%, we keep our rating at Neutral as near term outlook for the sector remains challenging.

4Q revenue was flat while PBT fell by 9.5% y-o-y. Net profit was inflated by some tax credit mainly due to double tax deduction claimed for freight charges on exports and tax exemptions on certain export products. Overall operating profit margin contracted to 16% vs 21% last year, due to rising costs amid weak pricing environment. No dividend was declared.

FFB sales cushioned earnings.
The company’s FFB sale in 2007 partially offset the poor earnings from the timber segment. With an increase of 3.9% and 63.3% in FFB output and selling price, the segment achieved RM9.8m at PBT level. Meanwhile, the timber products division turned red in 4Q, due to reduced volume of products sold as well as lower export selling prices caused by the strengthening of Ringgit. Management indicated that some marginal recovery in regards to demand and prices was seen in end 2007. However, in our view, given record high fuel prices and continued weakening of US$, a big rebound in timber demand volume and prices can only sustain an earnings recovery in 2008 for the timber segment.

Maintain Neutral at RM1.50 fair value.
We see some minor recovery in Leweko’s FY08 earnings, mainly underpinned by the surge in CPO prices this year. We largely maintain our FY08-09 earnings projections. Valuation multiple of 9x gives us a target price of RM1.50. In view of challenging outlook, we maintain our rating at Neutral.



filed: LEWEKO FY07 20080303.pdf by osk