Is JTiasa an investment opportunity?

Value Investing Case Study 75-1: A fundamental analysis of Jaya Tiasa Bhd to see whether it is a value trap or an investment opportunity.

Established in the 1980s as a timber company, Jaya Tiasa Holding Berhad (JTiasa or the Group) initially thrived on the abundant timber resources of Sarawak, Malaysia. However, as environmental regulations tightened and market dynamics shifted, the Group faced mounting challenges. The Group thus diversified into oil palm plantations in the 2000s.

Fast forward to today, and JTiasa stands at a crossroads, with palm oil operations being the main revenue and earnings contributor. The Group still has substantial capital in the timber operations as it waits for its forest plantation to reach a stage to provide commercial quantities of logs.

Join me as I dive into the history of the Group and see how it grapples with the dual pressures of profitability and environmental responsibility. Can JTiasa reclaim its footing in the timber industry? Will it successfully balance its portfolio in an increasingly competitive market?

The positive point is that the Group has improved its returns over the past 12 years. However, it is still not at a level where shareholders’ value can be created. To achieve this, the timber operations have to turn around. This in turn depends on resolving its log supply.

Even if you assume that the timber operation in 5 years can have revenue that is 50% of the Group’s 2024 revenue, there is not enough margin of safety at the current price.

Should you go and buy it? Well, read my Disclaimer.

Company background

Operating performance

Financial position

Valuation

Conclusion

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Company background

JTiasa was established in the 1980s as a timber company, focusing on logging and timber processing. In the 2000s, it diversified into the palm oil sector. I would classify the Group’s operations today into the following:

Oil palm. Its oil palm plantations cover a land bank of 83,483 hectares in Sarawak, Malaysia with a total planted and mature area of 69,589 hectares. The Group also owns four crude palm oil (CPO) mills.

Timber. This covers industrial tree planting and logging operations.

The timber concession areas located in Sarawak cover 412,478 hectares or about 12 percent of the production forest of Sarawak.

The Group is currently managing a total reforestation area of 120,395 hectares to ensure renewable and sustainable production of logs.

The Group’s downstream wood processing activity for plywood and veneer has been downsized since 2017 due to log supply problems. In its 2023 Annual Report, this was reported as temporarily ceased.

The timber operation was the main revenue and profit contributor a decade ago. However. the oil palm operation is currently the main revenue and profit contributor. Refer to Chart 1.

Chart 1: Sector Profile

The Group still has a sizeable amount of its net assets tied up in the timber sector as can be seen from Table 1. Over the past decade, the return from the timber operations is about half of that from the oil palm operations. The timber operations also have a lower PBT margin.

Table 1: Sector returns

Notes

a) Average of 2014, 2017, 2020 and 2023.

b) Average of 2014, 2017, 2020 and 2023.

c) 2023 Net Assets.

Note that JTiasa has its financial year end as Jun. As such in this article, unless stated otherwise, all the years related to the Group are for the financial year.

Operating performance

There was no revenue growth from 2013 to 2024. Refer to the left part of Chart 2. You can deduce from Chart 1 that this was because revenue growth from the oil palm operation was not enough to offset the decline from the timber operation.

Despite this, there was profit growth despite a huge drop in 2018/19. The profit in 2024 was more than 6 times that in 2013.

The drop in profits in 2018 and 2019 was due to losses from the timber operations due to a combination of reduced production volume and high costs. You can see the impact of the decline in the gross profit margin as shown in the right part of Chart 3.

“Following selective logging and ongoing Sustainable Forest Management Certification implementation, there was a 26% contraction of the log production volume resulting in the reduction of the plywood and veneer production volume… This translated to the division’s loss of RM 58.9 million in this reporting year as compared to RM 30.4 million loss last year.” 2019 Annual Report

The oil palm operations also incurred losses in 2019 “due to the weakened commodity pricing compared to the previous year. The average FFB selling price… a sharp 23% decrease, while the CPO price decreased by 23%...”

But you can see that the Group returned to profitability in 2021 with better margins. But this was due to the oil palm operations rather than the timber operations.

“…the oil palm division recording a 127% increase in profit before tax… average FFB selling price rose by 59 %...average CPO price increased by 44%...Despite the rise in timber prices…volume of log production decreased by 23%...The loss before tax and impairment…narrowed by 87% to RM 8.7 million from last year’s loss of RM 68.8 million, a direct result from the Group’s decision to temporarily close down our wood manufacturing factories in 2020…” 2021 Annual Report.

Chart 2: Performance Index and Margins

If nothing else, the above suggests a significant change in the business profile of the Group over the past 12 years. This can be traced to:

Changes in the Malaysian timber and logging policies towards sustainability and conservation. In the past logging was primarily seen as a means for economic development, and policies favoured rapid exploitation of forest resources. Today the Malaysian government has adopted more stringent regulations promoting sustainable logging practices with emphasis on sustainable forest management.

More favourable increase in palm oil prices compared to timber over the past decade. Refer to Chart 3. You can see that the average palm oil prices post-2022 were about 40 % to 50 % higher than pre-2021. But you do not see such a significant change in timber prices.

Chart 3: Timber and Palm Oil Prices

Returns

The return picture follows the profit pattern. Refer to the left part of Chart 4.

You can see the dip in 2018/19 for the ROIC and ROE. But there was a much smaller dip for the CFROIC. This meant that while profits declined significantly, there was no corresponding decline in the cash flow from operations.

Notwithstanding the 2018/19 dip, all the return metrics showed improving trends over the past 12 years.

I would posit that over the past 12 years, the Group did not create shareholders’ value because the returns were lower than the respective cost of funds. Over the past year years, ROIC averaged 3% compared to the current WACC of 13%. The ROE averaged 1% compared to the current cost of equity of 14%.

Even if you look at the past 3 years' performance, the shareholder’s value creation picture is not different. The 2022 to 2024 average ROIC was 11 % while the ROE averaged 10%. These averages were still lower than the respective cost of funds. If nothing else, they suggest a challenging business for the Group.

Chart 4: Returns and Operating Profit

Note to Op Profit Profile. I broke down the operating profits into fixed costs and variable costs.

Fixed cost = SGA, Depreciation & Amortization and Others.
Variable cost = Cost of Sales – Depreciation & Amortization.
Contribution = Revenue – Variable Cost.
Contribution margin = Contribution/Revenue.

Efficiencies

Given the challenging log supply situation and the changes in palm oil prices, the focus should be on improving efficiencies. There were positive signs of these when I looked at several operating and capital efficiency metrics.

Operating efficiencies. Refer to the left part of Chart 5. Ignoring the 2018/19 dips, there were improvements in the 4 metrics from 2013 to 2024.

Capital efficiencies post-2018. Refer to the right part of Chart 5. There were improving trends in the 4 metrics although the cash conversion cycle was relatively volatile.

Chart 5: Operating and Capital Efficiency Trends

You can get a sense of the impact of these efficiency improvements by looking at the contribution margin and fixed cost as shown in the right part of Chart 4.

The contribution margin averaged 27 % in 2013/14. This increased to an average of 41 % in 2023/24. Part of this could be due to higher palm oil prices. But over the past 12 years, costs have gone up. As such, a better contribution margin could also be attributed to better cost control.

Peer comparison

I compared JTiasa's performance with 3 other Bursa timber cum plantation companies as shown in the table in Chart 6. You can see that only Ta Ann had revenue growth from 2013 to 2023.

This was because Ta Ann had a much larger oil palm operation compared to its timber one. For details refer to “Is Ta Ann a value trap?”. I have also covered another plywood company that has since ceased its plywood operations. Refer to “Eksons is now a value trap (Oct 2023)”

You can see from the right part of Chart 6 that all the companies experienced a drop in revenue in 2018/19. There is also the 2020 decline due to COVID-19.

Chart 6: Peer revenue

I looked at the trends of 4 metrics to get a sense of how well JTiasa performed compared to its peers. Refer to Charts 7 and 8.

I would rate JTiasa's return on capital as average. However, its EBIT margin had improved so that by 2022 it had the best EBIT margin.

There is also a similar improvement in the levered free cash flow margin from the worst in 2013/14 to the best in 2022/23.

But its EPS is probably just about average.

Chart 7: Bursa Peer Return on Capital and EBIT Margi

Chart 8: Bursa Peer Levered Free Cash Flow Margin and EP

The overall picture can be summarized as follows:

Operational strength. The company is improving its operational efficiency, as indicated by the better EBIT and cash flow margins.

Financial health. The growth in levered free cash flow is a strong positive signal for financial health and flexibility.

Room for improvement: While the operational metrics are strong, the average return on capital and EPS suggest there is still room for improvement in capital allocation and overall profitability.

Financial position

I would rate JTiasa as financially sound.

As of Jun 2024, it had RM 283 million cash. This is equal to 14 % of its total assets.

It had a Debt Equity ratio of 0.13 as of Jun 2024. This has come down from its 2019 high of 0.82.

Over the past 12 years, it generated positive cash flow from operations every year. During this period, it generated RM 2.3 billion cash flow from operations compared to the total PAT of RM 236 million. This is a very good cash flow conversion ratio.

From 2013 to 2024, it had a negative Reinvestment. I defined Reinvestment = CAPEX + Acquisition – Depreciation & Amortization + increase in Net Working Capital. The negative value implies that the amount spent on CAPEX and/or the increase in Net Working Capital was smaller than the Depreciation & Amortization. This is a good position as it meant that the company did not have to allocate funds to support its growth.

It had a good capital allocation plan. Refer to Table 2. The cash flow from operations was sufficient to fund its CAPEX and the excess was returned to shareholders as well as to reduce its debts.

Table 2: Sources and Uses of Funds 2013 to 2024

Valuation

The Group’s performance suffered over the past 12 years due to the timber operations. I thus looked at 2 Scenarios.

Scenario 1. This is based on the current business profile.

In other words, there is not much change to the timber operations. The 2024 revenue represents the base revenue. I assumed that this is a mature business with revenue growth at the long-term GDP growth rate of 4%. Thus, in Year 6 revenue is projected to be RM 1,285 million. This is 26 % higher than that in 2024.

I also assumed that because of the cyclical nature, the 2017 to 2024 margins and capital efficiency represent the performance over the cycle. This is not unreasonable looking at Chart 3.

Because of its cost control, I assumed that the fixed cost would grow at the long-term GDP growth rate of 4%. Looking at the left part of Chart 4, this does not look unreasonable.

Scenario 2. This assumes that the forest plantation has reached a stage where it can contribute significantly to the logs supply.

There will already be revenue growth under Scenario 1 of RM 1,285 million in Year 6. I will assume that there is another RM 238 million of timber revenue so that the total revenue in Year 6 = RM 1,523 million. The total projected revenue in Year 6 is 50% higher than that in 2024. Thereafter the revenue will grow at the long-term GDP growth rate of 4%.

The 2017 to 2024 capital efficiency remains unchanged like that for Scenario 1.

Because of the lower PBT margin from the timber operations (refer to Table 1), I estimated that the contribution margin in Year 6 will be reduced by 4%. This was estimated by comparing the weighted average PBT margin in Year 6 with the average PBT margin under Scenario 1.

Similar to Scenario 1, I assumed that the fixed cost would grow at the long-term GDP growth rate of 4%.

Table 3 summarizes the intrinsic values compared to the market price of RM 1.15 per share. You can see that there is no margin of safety under Scenario 1. There is only a 7 % margin of safety under Scenario 2.

Table 3. Valuation summary

Valuation model – Scenario 1

In valuing JTiasa, I based it on the operating profit model shown in the right part of Chart 4. I valued it based on the single-stage Free Cash Flow to the Firm model.

FCFF = EBIT(1 – t) - Reinvestment

EBIT = Revenue X Contribution margin – Fixed cost.

I assumed that the Reinvestment is zero given the historical negative Reinvestment.

Value to the firm = FCFF X (1 + g) / (WACC – g)

Table 4 illustrates the calculation under Scenario 1. The WACC was based on the first-page result of a Google search for “Jaya Tiasa WACC” as shown in Table 5.

Table 4: Sample calculation – Scenario 1

Table 5: Estimating the cost of funds

Valuation model – Scenario 2

The valuation under Scenario 2 is based on a 2-stage valuation model as shown in Table 6.

The key assumptions here are:

Revenue will grow so that the terminal revenue in Year 6 will be 50% higher than that in 2024. As there will already be growth for the 2024 business under Scenario 1, the additional growth will come from the timber operations.

The Year 6 contribution margin would be 4% lower than that in 2024. The contribution margins for the other years would be reduced proportionately. Table 7 illustrates how this is estimated.

All the other parameters – Fixed cost, Reinvestment margins, WACC – follow those of Scenario 1.

Table 6: Sample calculation – Scenario 2

Notes

a) Assumed growth rate such that the terminal revenue will be 50% higher than the 2024 revenue.

b) Pegged to growth rate.

c) Assumed declined due to changes in the profile of the business.

d) Assumed growth at a terminal rate.

e) Revenue X Margin and after accounting for Fixed costs.

f) Assumed zero Reinvestment.

g) b X f.

h) FCFF for each year = e - g.

j) Assumed constant D/E ratio. Refer to the WACC table.

k) NPV for each year = (h X j).

l) Terminal for the year discounted at terminal growth rate.

m) 5 years NPV + terminal value.

n) Inclusive of any excess TCE. Non-operating assets, MI and Debt.

o) Based on the number of shares.

Table 7: Estimating the reduction factor

Notes

(d) Total of c / Total of a

(e) Wt margin / Scenario 1 PBT margin = 14 / 15 (there are rounding errors).

Case Notes

When conducting a fundamental analysis, I start with a historical picture. This provides valuable insights that inform present evaluations and future projections.

Trend identification. These trends can reveal patterns that may not be apparent from a snapshot of current performance.

Contextual understanding. Every company operates within a specific context shaped by industry dynamics, economic cycles, and regulatory changes. Historical analysis provides context for understanding how these factors have influenced a company's performance.

Evaluation of management decisions. Analyzing a company's historical decisions offers insights into management effectiveness.

Benchmarking. Historical performance data enables comparisons with industry peers.

Risk assessment. Understanding these historical fluctuations allows investors to make more informed decisions regarding risk tolerance and investment strategy.

Informed projections. Finally, a solid grasp of historical performance underpins future projections. Without a thorough understanding of past performance, these projections may not be reliable.

As you can see, fundamental analysis requires expertise and time. That is why I created the Fundamental Mapper to shortcut the process. Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies.

Risks and limitations

With only the oil palm operations contributing to the bottom line, the profitability of the Group would depend on turning around the timber operations. This in turn will depend on the readiness of its forest plantation to supply logs in commercial quantities.

I must admit that I could not find any information in its Annual Reports on this readiness. The only statement was on its commitment “to fully plant by the year 2025 with fast-growing tree species…for sustainable log supply…”

As such Scenario 2 with the growth in the timber operations is an unfounded assumption. I suspect that this is not realistic because if it were so, the Group would have talked about it in its Annual Reports.

But I posit 2 pictures from a risk perspective:

The 50% higher revenue is not a very high bar. Under Scenario 1, with the 4% growth rate, the revenue in Year 6 would be 26 % higher than the 2024 revenue. As such the 6th Year revenue under Scenario 2 is only about another 20% higher compared to Scenario 1.

Based on my valuation model, in order to have a 30% margin of safety, the revenue in Year 6 must be 75% higher than that in 2024. This is equivalent to a timber operations revenue of RM 746 million in Year 6. I am not sure whether its forest plantation is ready for such a volume of timber.

The other issue is the WACC. At 13% this looks like a higher WACC than my other companies. If the WACC was 10%, there would be more than a 30% margin of safety. To give you a sense of this, I have listed below the GuruFocus estimates of its peers’ WACC.

17.0 - Jtiasa.

9.0 % - Ta Ann.

17.9 % - Subur Tiasa.

5.4 % WTK.

Conclusion

JTiasa has undergone a significant transformation since its inception as a timber company in the 1980s. The diversification into oil palm has shifted the Group's primary revenue source.

Currently, the oil palm operation is the main profit driver. The timber segment faces declining production volumes due to policy shifts toward sustainable practices. The Group's reliance on oil palm highlights the critical need for a turnaround in the timber operations.

Despite a period of profitability resurgence post-2020, the overall financial performance over the past decade indicates that JTiasa did not create shareholder value.

Looking ahead, the focus must be on improving operational efficiencies. This hinges on the readiness of the forest plantations to contribute to log supply. The current strong financial position provides a stable foundation for this transformation.

Unfortunately, there is not enough margin of safety even on an optimistic view that the forest plantation can immediately provide increasing log supply. You can understand why I would sit out on JTiasa for the time being.

END

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I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such.

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