1QFY08 Results Review

1Q performance came in below our expectations. Though revenue were within our estimates, net profit fell significantly to RM1.7m compared to preceding year corresponding quarter at RM5.4m. Weak export price due to strengthening Ringgit and higher raw material input costs are attributed to its eroding profit margins and consequently incurring operating losses of RM1.3m for its logs and timber products division. Despite the weaknesses, the group’s FFB division cushioned losses with PBT of RM4m (+300% yoy) due to higher average CPO price (+75.2% yoy) coupled with higher FFB yields (+24.5%). Toning our estimates down to factor in market changes such as higher raw material price and lower selling price we revised net earnings downwards by 38.9% and 38.1% for FY08 and FY09. This translates to a lowered target price of RM1.30 from RM1.50 previously. NEUTRAL rating maintained as near term outlook for the sector still remains challenging.

Timber products sales volume up qoq… but are insufficient to offset losses incurred by the strengthening Ringgit and higher cost base which explains the discrepancies between topline and bottomline. Yoy comparison shows logs and timber products division revenue decline by 8.2% but PBT dipped drastically by 126% resulting in a pre tax loss of RM1.3m compared to preceding year corresponding quarter of PBT at RM5m.

Margins hit. Higher cost base and stronger Ringgit translated to a qoq contraction in EBITDA margins from 15.9% to 10.9%. On a net basis, NP margin declined from 13.1% (4QFY07) to a single digit at 5.3% in the current quarter.

FFB sustaining levels. FFB sales continue to offset poor earnings by the timber segment. Average CPO selling price and yields surge 75.2% and 24.5% this quarter. The segment achieved a PBT of RM4m against preceding year corresponding quarter of only RM1m. We believe CPO price to remain resilient at a high of RM3,500/MT thus will play a crucial role in keeping profitability in-line.

NEUTRAL for now. At this juncture we maintain our NEUTRAL stance on Leweko as the timber sector still remains challenging. Target price revised downwards to RM1.30 from RM1.50 previously, in light of unfavourable product pricing and surging cost pressures. Valuation is based on a composition of simple average peers PE of 7x and Average Peer’s Price/BV of 1.2x









filed: Leweko1QFY08.pdf