Tricky conditions ahead for companies in wood sector

PETALING JAYA: Hong Leong Investment Bank Research (HLIB Research) remains neutral on the wood manufacturing sector, as conditions are expected to stay difficult in the second half of this year (2H25) amid weak demand, margin pressures and currency volatility.

The research house said the industry continues to grapple with a subdued global market, cost inflation and a softer US dollar, which has hurt the earnings of export-oriented players.

Timber exports were noted to have dropped by 5.3% year-on-year (y-o-y). This was potentially due to Chinese dumping and soft global demand.

For the rest of 2H25, the operating environment is expected to remain tough, with pressures from a weaker US dollar, tariff risks, and rising electricity costs, though these could be partially offset by lower resin prices.

The US dollar index fell 11% in 1H25, its worst start to the year since 1973.

“Companies such as Evergreen Fibreboard Bhd and Heveaboard Bhd, with high US dollar revenue but non-US dollar costs, are highly vulnerable.

“We expect the ringgit to average at RM4.35 against the US dollar for this year and further US rate cuts pose risks,” the research house added.

Domestically, the average base electricity tariff in Peninsular Malaysia has been raised by 13.6% to 45.4 sen per kilowatt hour, effective July 1.

The newly implemented automatic fuel adjustment mechanism is expected to result in monthly tariff revisions tied to global fuel prices and foreign exchange movements, though the full impact is not yet clear.

More clarity is expected once the first July bill is received, by which time companies should also have a better utilisation plan.

While input costs remain a concern, the research house noted that falling resin prices may offer some respite.

“Brent crude has averaged a lower RM71 per barrel, helping to ease cost pressures. Our inhouse forecast is US$67 per barrel for this year, underpinned by a de-escalation in geopolitical conflicts in the middle east, increased output by the Organisation of Petroleum Exporting Countries, and demand slowdown,” it said.

Meanwhile, HLIB Research considers the reviewed US tariff on Malaysia to be more stable and competitive.

The improved tariff environment could support a recovery in indirect orders linked to the US market.

Despite the cautious outlook, Evergreen remains HLIB’s preferred pick due to its strong presence in the Middle East and geographically diversified operations.

“While we remain cautious on the broader panel-board sector due to margin headwinds, Evergreen is our preferred pick with a target price of 36 sen, supported by its strong Middle East exposure and strategic diversification, including new Indonesian capacity by the third quarter of this year.

“These factors offer better earnings visibility and help cushion against regional cost inflation,” the research house added.