RHB Research has upgraded the timber sector to "overweight" from "neutral", given the brighter outlook for the timber industry and improving price prospects.
The research firm sees potential for a rerating of timber stocks but has not changed the valuation targets for such stocks.
"We are positive on the prospects for the timber sector as a whole on the back of strong recovery in log prices following shortages in Malaysia and improving economic activity in Japan, resulting in rising plywood imports," it said in a research note yesterday.
Log production in Malaysia is on a declining trend due to depleting natural resources, stringent environmental safeguards being imposed and weather abnormalities.
Given the decline in production and ensuing shortage in the global market, Malaysian log prices have been rising steadily since April.
RHB Research expects the price to hold at current level until next year.
The Japanese plywood import volume are also improving and growing at 9.1 per cent year-on-year for the January and May period as demand from housing developers rises.
However, plywood prices have not risen significantly, given the general lag of four to six months to pass on higher log costs to plywood customers.
Prices are expected to start moving up sharply from September to October onwards, it said.
"With our revised forecast, we see a potential for re-rating of timber stocks under our coverage.
"We recommend Ta Ann to 'buy' from 'neutral' with revised fair value of RM4.37, Jaya Tiasa to 'neutral' from 'sell', with revised fair value of RM2.11 and maintain 'buy' on WTK Holdings Bhd with higher fair value of RM1.80," the firm added.
WTK Holdings is the RHB Research's top pick due to Jaya Tiasa and Ta Ann's exposure to the palm oil industry.
Any improvement from the timber division in Jaya Tiasa and Ta Ann will somewhat be diluted by the weaker contribution from the plantation division, the research firm added.