The Malaysia-based company, which also has operations in New Zeeland, China and Guyana, and sells its products to more than 30 countries, will be listing in Hong Kong rather than in Kuala Lumpur in the hope of achieving better liquidity for its shares. But observers say the choice of markets likely also signals how important the company believes China will be for its future growth.
Together with India and Japan, the Mainland is already one of Samling's most important customer markets with demand coming both from the booming construction industry and from more downstream players like the export furniture industry. Samling also has manufacturing facilities of its own in China for the production of plywood and laminated veneer lumber, or LVL for short. Its other manufacturing facilities are located in Malaysia and Guyana.
Japan is the companyÆs top market for plywood and veneer, accounting for 36% of revenues in this segment in the most recent financial year, followed by North America with 19%, Greater China with 11% and Europe with 9%. Log sales on the other hand go primarily to developing markets with Greater China at the top of the list, accounting for 30% of segment revenues, followed by Malaysia with 23%, India and Pakistan with 18% and Japan with 14%.
According to specialists, the thing that makes this company stand out is its large forests. Samling has resources of about four million hectares - roughly the size of Switzerland û which means it is largely self-sufficient in terms of supplying logs for its downstream operations with little need to buy timber in the open market.
The company does, however, purchase some of the timber it needs for its manufacturing business in China to reduce transport costs, among other things. Typically it feeds about half of its harvested timber into its own operations, while the rest is sold as logs. The split can be adjusted to make the most of demand and selling prices for different products at any given time.
It currently has gross forestry concession areas (natural forest land it leases from the government) of approximately 1.4 million ha in Malaysia and 1.6 million ha in Guyana. In addition, it has harvesting rights for a further 445,000 ha in Guyana and plantation land amounting to 438,000 ha in Malaysia and 35,000 ha in New Zeeland. Some 57% of the Malaysian concessions, or 800,000 ha are held by Lingui, a 59.7%-owned subsidiary which is also listed on the Kuala Lumpur stock exchange in its own right. Rumours continue to swirl that Samling plans to take it private, however.
ôThe story with Samling is not so much that the company needs to increase its forest supply, but that it doesnÆt yet meet its allowed harvest quota for its existing resources,ö notes one source familiar with the company. ôThe challenge will be to cut more wood in Guyana and New Zeeland and it is trying to ramp up its capacity in those places.ö
Indeed, after a few years of heavy investments in new logging equipment plants and infrastructure, the company is now ready to reap the benefits as selling prices are on the rise. Sources familiar with the company say capex spending is expected to fall significantly in the current fiscal year from a combined $248.7 million in the previous three years.
Even so, the company said it plans to use about HK$644 million ($82.5 million) of the net proceeds from the IPO to acquire concessions, harvesting rights and plantations to increase its woodflow (the amount of wood harvested).
Samling is offering 1.05 billion shares, or about 25% of the company, at a price between HK$1.60 and HK$2.08 apiece for a total deal size of HK$1.68 billion to HK$2.18 billion ($215 million to $280 million). A 15% greenshoe can lift the total proceeds to a maximum $322 million. As usual, 10% of the deal will be earmarked from Hong Kong retail investors.
The company will be 60% controlled by Samling Strategic and the MalaysiaÆs Yaw family at the time of listing. Credit Suisse, HSBC and Macquarie are joint bookrunners for the deal.
The price range values Samling at about 11 to 14 times its projected earnings for fiscal 2007, which ends on June 30, and at 9 to 11.5 times its fiscal 2008 earnings. According to the listing document, the company estimates a net profit of at least $72.2 million, after posting a $22.3 million profit in the first quarter to September 2006.
The estimated full-year earnings will be a huge improvement from the previous yearÆs $5.1 million, when the logging harvest for most Malaysian forestry companies was negatively affected by floods. However, it will also be more than three times the net profit of roughly $23 million it achieved in each of the 2004 and 2005 fiscal years.
The top end of the valuation range pitches the company at a slight premium to some of the other Malaysian forestry companies, which according to some analysts trade at 2007 PE multiple of 10 times (on a calendar year basis). Others, however, say they trade at more like 12 times. Either way, most of these companies are fairly illiquid and also much smaller in terms of market capitalisation and sources say investors generally accept that SamlingÆs more global focus should warrant a premium over these comps.
Ta Ann Holdings, which aside from its logging operations also manufactures plywood, sawn timber and timber products, has a market cap of no more than $680 million, while WTK Holdings which has similar timber operations, comes up to $410 million. And this is after Ta AnnÆs share price has more than tripled since mid-November. WTKÆs upward streak started already in August, and since then the share price has just about doubled.
By comparison, Samling will have a market cap between $860 million and $1.1 billion, depending on the final pricing.
The US comparables are typically bigger and also trade at higher 2007 PE multiples of around 24 times, although many of these have more diverse operations that also include the production of pulp and paper.
As for all timber companies, selling prices, both for logs and downstream products like plywood, veneer and fibre boards, are a key earnings driver. And here the trend should remain positive, given the pickup in demand for construction in India, China and Japan as well as the clamp-down on illegal logging in Indonesia, which is keeping the supply tight, analysts argue.
ôThe supply situation has never been tighter than today and I believe we are in a multi-year price cycle,ö says one Malaysia-based analyst who projects average plywood prices to rise by 30% in 2007 after a 30-34% year-on-year increase in the fourth quarter last year for most wood categories.
Since 2003 plywood prices have increased by about 16% per year, while the price for tropical hardwood logs, has risen by 10.5% a year since 2002, primarily due to the supply constraints.
ôThis is a very leveraged company so if prices go up it will make a killing. Since it already has all the equipment, every sale will have a P&L impact,ö argues one specialist.
Investors will have to bare in mind though the risks that come with investing in commodities like wood that are sensitive to extreme weather conditions, such as heavy rain or flooding. SamlingÆs forestry concessions, plantations and production facilities in Malaysia, New Zealand and Guyana are also subject to significant government and environmental regulations, which could change at short notice.
A renewed rise in oil prices would also have a negative impact on transportation costs, while resin, an oil-based product, is one of the materials used to make veneer, one sources notes.
The Hong Kong IPO will kick off next Friday after the Chinese New Year holidays and the order books for both retail and institutions will close on February 28. The trading debut is scheduled for March 7.
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