Wood & Wood products sector – Strong show but headwinds on the horizon

• 1Q22 aggregated revenue of listed W&WP companies increased 10.2% yoy, while 1Q22 aggregated NP soared 28.2% yoy.
• We forecast that W&WP companies’ GM might edge down 0.5% pts to 0.8% pts yoy in 2Q22F before staying flat in 2H22.
• Our top picks for the sector are PTB and ACG.

Earnings growth recovered in 1Q22

The wood and wood product export turnover in 1Q22 showed a strong recovery after being affected by Covid-19 in 2H21. The W&WP export value in 1Q22 increased 6.5% yoy and 39% qoq, reaching US$3.9bn as domestic wood factories have resumed and run at 90%-100% capacity post-Covid-19. Based on our estimates, 1Q22 aggregated revenue of listed W&WP companies increased 10.2% yoy, while sector net profit soared 28.2% yoy (vs 15% yoy in 4Q21). The top strongest 1Q22 earnings growth recorded the large wood manufacturers including ACG (+18.1% yoy), PTB (+43.1% yoy) mainly driven by cutting labor costs and recognizing profit from the real estate segment.

Rising raw materials weigh on FY22 gross margin

The Russian government has introduced a ban on exporting logs to European countries and the U.S, leading to a global shortage of raw wood supplies, leading to timber wood price hike globally. According to Trading Economics, the price of the U.S. timber wood increased by 25% ytd in Mar-22, reaching US$1,412/board feet. Most of W&WP companies’ GM edged down in 1Q22 due to high input material and logistic cost. We think that W&WP companies’ GM in 2022F will be affected as supply shortage will continue to push up the price of wood materials in 2022F. We forecast that W&WP companies’ GM will continue to edge down by 0.4-0.6% pts yoy in 2022F.

Is this time for bottom-fishing?

W&WP stocks have dropped about 24.9% from peaks following market correction and currently are traded at average TTM PE of 15.7x. We like stocks with high export revenue to the US market and leading position in the domestic market. As a result, our top picks are PTB and ACG for long term investment, in view of their positive FY22-23F earning outlook.

Upside potential includes 1) stronger demand from the U.S and E.U market and 2) the recovery of new property supply. Downside risks include 1) higher than expected logistic cost and wood material may affect the W&WP companies’ GM and 2) the higher mortgage rates and house price could reduce the demand to buy houses and interior wood products in the US in 2022.

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