Latest / Investor Exchange / How Adverse Market Conditions Impacted Jawala Inc.’s FY2025 Performance

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How Adverse Market Conditions Impacted Jawala Inc.’s FY2025 Performance · Investor Exchange

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  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
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  Welcome back to the Deep Dive. Today, we're cutting through,
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  well, quite a bit of data, actually,
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  to bring you the core insights from a specific corner of the market.
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  That's right. We're heading over to Southeast Asia, Saba, Malaysia, to be precise.
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  And we're going to dissect the full year financial results for a company called
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  Jawala Inc. Jawala focuses on forest
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  resources, primarily industrial tree plantations, think logs, timber.
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  We've got their unaudited results for the full year 2025, which ended July 31st.
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  Right. And we also have their profit guidance announcement that came out around the same time. Exactly.
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  So we'll be looking at both. Our mission here is really to figure out the story behind these numbers.
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  Why did Jawala sink deeper into a net loss this year? And importantly,
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  how are they funding what looks like a pretty significant long-term strategy,
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  especially when the short-term environment seems, well, tough? Hmm.
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  And just for context, we're dealing with Malaysian ringgit, that's RM.
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  100 cent makes up one ringgit for anyone tracking currencies.
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  Okay, let's unpack this. Maybe we should start with the revenue.
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  Because that seems like a bit of a paradox. It really is. It's definitely the
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  definition of a split result.
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  And understanding this is pretty crucial, I think. So what does that mean, a split result?
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  Well, if you just glance at the full fiscal year 2025 headline number.
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  Joala's revenue actually looks, you know, pretty decent.
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  It increased by 25%. Okay, 25% up. Sounds good.
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  Yeah, hit RM10.184 million compared to about RM8.15 million the year before.
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  So you'd initially think, all right, things are moving up. But that's not the
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  whole picture, is it? Not at all.
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  That's the slightly deceptive part. Because if you slice the year in half,
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  you see a completely different story in the second half. H2. Ah.
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  So H1 must have been really strong to compensate. Presumably, yeah.
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  Because the revenue for the last six months of FY 2025, it just fell off a cliff,
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  down 67%. Wow, 67% down. Yeah.
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  It dropped from over RM8 million in H2 the previous year down to just RM2.67
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  million in H2 of this year, FY 2025.
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  Okay, that's a massive drop. So that H2 performance must have really dictated
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  the final bottom line then.
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  Absolutely. That huge deceleration in sales volume directly led to the,
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  let's say, less positive bottom line reality.
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  Which was? A deeper loss, unfortunately.
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  The group recorded a total comprehensive loss of RM3.475 million for the full
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  year. Okay. And how does that compare to last year?
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  It's a 30% bigger loss compared to the RM2.683 million loss they posted in FY 2024.
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  Right. And that flows through to the earnings per share, I assume?
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  Loss per share, yeah. It widened from 1.77 cent per share to 2.22 cent per share.
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  Okay, so revenue up overall, but crashed in H2, leading to a bigger loss.
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  But here's something interesting I saw, the gross profit margin.
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  Ah, yes, that's a key point. Despite that huge swing in sales volume between
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  the halves, the gross profit margin stayed remarkably stable. How stable?
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  Unchanged. It was 32% for FY2025, exactly the same as FY2024. Okay, wait.
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  So they sold way less timber in H2, but the profit margin on what they did sell was the same.
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  Precisely. And this is quite telling, actually. It suggests management was exercising,
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  you know, market discipline.
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  Meaning? Meaning they weren't just desperately slashing prices to try and force
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  sales when the market turned sour.
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  They held their margin structure. So the bigger loss wasn't because they were
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  selling timber too cheaply.
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  It was just because they weren't selling much timber at all in that second half. Exactly.
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  And that wasn't an accident. It was a strategic choice. Ah, this connects to
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  the profit guidance, doesn't it? It does.
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  Jawahar explicitly said in their
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  guidance that the expected net loss was mainly due to lower sales in H2.
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  And the reason for those lower sales, a management decision. What decision?
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  They deliberately decided to delay logging and production operations. Why would they do that?
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  Because, according to them, of adverse market conditions and also some difficult
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  weather, they basically looked at the market and said, you know what?
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  The price we'd get right now isn't worth cutting down these trees. So they hit pause.
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  Right. Preserve the inventory, wait for better prices.
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  Makes sense strategically, but obviously hurts the income statement in the short
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  term. Definitely save the margin, but starve the top line and ultimately lead the bottom line.
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  Okay, so that strategic pause explains the H2 revenue drop, but the total loss
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  still increased by 30% year over year.
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  If they were managing costs and margins, what else drove that bigger loss?
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  This is where it gets quite technical, right?
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  Yeah, there are a couple of really significant factors here beyond just the lower sales volume.
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  The first big one is about valuing those trees we mentioned,
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  the biological assets. Ah, the fair value accounting? Exactly.
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  This is always critical for any forestry or farming company.
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  It's also a source of, well, potentially massive non-cash swings on the income statement.
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  Explain that a bit more, the non-cash part. Okay, so think of Joala's growing
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  trees as their living inventory.
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  Accounting rules, specifically MFRS 141 agriculture, require them to revalue
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  these biological assets every year.
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  To reflect their growth and what they might be worth in the future. Right.
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  They estimate the future value, considering growth, timber prices, costs, etc.
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  And the change in that estimated value from one year to the next is recorded
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  on the income statement.
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  Often, as trees grow, this results in a non-cash gain, a fair value gain on biological assets.
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  Which helps offset other operating costs on paper. Exactly. It boosts the reported
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  profit, even though no actual cash came in from that specific adjustment.
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  Okay. So what happened with that gain in FY 2025 for Jawala?
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  Well, it didn't just shrink. It practically collapsed.
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  That fair value gain decreased by a huge 68%. 68 percent. Wow.
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  Yeah. It went from a positive RM5.77 million gain in FY 2024,
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  which really helped their bottom
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  line that year, down to only RM1.855 million this year. OK, hold on.
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  That difference is almost RM4 million right there. Precisely.
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  That nearly four million ringgit negative swing alone is a massive contributor
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  to why the net loss got so much bigger this year compared to last.
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  So why did the valuation drop so much? Was it just the trees grew less?
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  It wasn't primarily about physical growth.
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  The company stated it was due to changes in the assumptions used in the valuation,
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  reflecting those same adverse market conditions they reacted to by pausing logging.
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  What assumptions changed?
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  The independent valuer had to revise some key inputs. For example,
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  they lowered the estimated log selling price assumption used in the model from
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  RM400 per cubic meter down to RM380 per cubic meter.
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  Okay, reflecting weaker market prices. Right.
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  And they also lowered the estimated yield, basically, how much usable timber
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  they expect to get per hectare of forest.
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  That dropped from 147 cubic meters per hectare down to 140.
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  So it's a double hit on the valuation. The market expects lower prices and maybe
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  slightly less timber per area harvested in the future.
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  Exactly. It reflects that challenging outlook they mentioned.
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  So that's factor number one, the biological asset valuation swing.
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  Okay. Huge impact. What else contributed to the bigger loss?
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  You mentioned another technical point.
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  Yes, the second major item was a significant jump in finance expenses. How significant?
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  They shot up to RM637,000 in FY2025.
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  Compare that to just RM95,000 the year before. Okay, that's a big increase.
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  Was that new debt or much higher interest rates? Not necessarily.
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  This is more of an accounting treatment change. And it relates to a specific
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  loan, the FPD Loan Forest Plantation Development Loan. Right,
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  FPD. What changed in the accounting?
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  Okay, this is where it gets a little into the weeds, but it's important.
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  In FY 2024, the interest expense on this FPD loan was capitalized.
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  Capitalized. Meaning it wasn't treated as an expense on the income statement?
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  Correct. When they were in the main development phase, building up the plantation,
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  the interest cost was added to the cost of the biological asset on the balance sheet.
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  It didn't hit the profit and loss statement directly.
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  So it made the reported profit look better in FY 2024.
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  Essentially, yes. It kept that interest cost off the P&L for that period.
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  But in FY 2025, they switched. The interest expense was expensed.
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  Meaning it went straight onto the income statement as a cost. Exactly.
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  It hit the P&L directly, contributing to the reported loss for FY 2025.
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  This is a standard accounting transition as a project matures from development to operation.
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  But it means that RM637,000 finance costs hitting the bottom line this year
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  wasn't necessarily new cash outflow related to interest, but rather a required
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  change in how it was reported. OK, I get it.
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  So the biological asset markdown was a huge non-cash hit reflecting market conditions.
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  And this finance expense change was a required accounting shift that also pulled
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  the reported profit down.
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  Those are the two really big drivers of the increase in the loss compared to the prior year.
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  But it wasn't all negative on the cost side, was it? I saw some areas where
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  they seem to manage things quite well.
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  No, you're right. There were some definite positives in terms of internal cost control.
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  Administrative expenses, for instance, actually decreased by 13 percent.
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  How much is that in ringgit?
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  It saved them about RM 1.1 million. And that came mainly from lower spending
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  on employee compensation, professional fees, and travel.
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  So that shows active management trying to control the controllables.
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  That's good to see. And what about collecting money they were owed?
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  Another positive point, actually. They managed to record a reversal of impairment
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  loss on trade receivables.
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  A reversal, meaning they collected debts they previously thought were bad.
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  Exactly. They got a gain of RM268,000 this year from collecting old debts.
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  Contrast that to FY2024, where they had to recognize a loss of RM1.4 million
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  because they couldn't collect.
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  So a big positive swing on collections. Okay, so good internal cost control, good collections.
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  But there was one other income line that went down, wasn't there? Yes.
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  Other income decreased quite a bit by 52%, about RM146,000 less.
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  This was mainly interest income they earned on fixed deposits.
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  And why did that go down? Did rates fall?
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  The reason they gave is quite revealing, actually. They said it was due to the
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  uplift of fixed deposits.
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  Uplift, meaning they took the money out?
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  Yes. They took cash out of those interest-earning deposits to use it for.
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  And this is key, planting and maintenance activities.
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  Ah, so they're sacrificing interest income to fund the actual operations and planting.
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  Exactly. Which leads us perfectly into looking at the balance sheet and how
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  they're financing this whole operation, especially the ongoing investment.
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  Right. Let's shift to the balance sheet then.
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  Unsurprisingly, given it's a forestry company, those biological assets must
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  dominate, right? Absolutely.
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  They're valued at RM52.5 million. That represents a huge 87% of their total non-current assets.
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  It really is the core of the company's value. And are they still investing heavily
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  in these assets, even with the current losses?
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  Oh, yes. They're pouring money in. Those biological assets increased in value
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  by 24%, or RM10.3 million, during FY2025.
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  And how much of that increase was actual cash spending versus the fair value
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  being we talked about? Good question.
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  The fair value gain was only RM1.85 million, remember.
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  The main driver of the increase was RM8.4 million in actual cash-spent additions,
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  booked as costs incurred for replanting and maintenance.
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  Wow, RM8.4 million cash into the ground. It really underscores the capital-intensive,
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  long-cycle nature of this business.
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  You have to keep investing today to have timber to sell years down the road,
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  even if the current market is weak.
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  But spending RM8.4 million in cash requires... years.
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  Cash. How did their liquidity position look at the end of the year?
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  Not great, frankly. Their cash and bank balances decreased very sharply.
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  They ended FY 2025 with only RM 2.4 million down from RM 8.9 million the year before.
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  Okay, that's a significant drop. Where did the cash go? Well,
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  that RM 8.4 million investment in biological assets explains most of it.
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  Net cash used in investing activities overall was RM 8.5 million.
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  That lines up almost perfectly with the cash train. So if they're spending that
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  much cash on investing and presumably still have operating costs and revenue
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  is down in each, too, how do they fund it all? Did they borrow more? They did.
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  Total borrowings increased significantly. They went up from RM17.8 million at
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  the end of FY 2024 to RM21.8 million at the end of FY 2025.
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  So another RM4 million in debt. Primarily, yes.
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  And they specifically mentioned this was mainly due to drawing down more from
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  that FPD loan facility, the one we discussed regarding the interest capitalization
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  change. The loan specifically for plantation activities.
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  Exactly. So they are clearly using debt to bridge the gap between their operating
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  cash flow, which was likely negative given the H2 slowdown, and their significant
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  capital expenditure needs for planting.
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  Debt financing the growth of the trees while waiting for better markets. Okay.
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  Now, you mentioned connecting this to the bigger picture. Is there anything
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  else on the balance sheet that gives a clue about their funding strategy?
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  Yes, there's a really interesting detail if you dig into the equity section,
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  specifically concerning reserves.
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  Okay, what did you find? Their main subsidiary, JPISB, previously held RM2.6
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  million, which was classified as non-distributable strategic reserves back in FY 2024.
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  Strategic reserves, what were they for?
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  The notes indicated this money was specifically set aside back in 2023 to help
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  fund operating expenses and capital expenditure for the period between 2023 and 2026.
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  Think of it as an internal rainy day fund or buffer. Okay. RM 2.6 million set
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  aside for exactly this kind of situation.
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  So what happened to that reserve in FY 2025?
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  It's gone. The line item for non-distributable strategic reserves reads RM nil as of July 31st, 2025.
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  Wow. So they used it all up. That's the clear indication.
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  They've fully drawn down and utilized that internal buffer, likely to help fund
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  that RM8.5 million cash used in investing and cover operating expenses during
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  this really challenging period with low H2 sales.
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  That's quite critical, isn't it? It suggests they're operating without that
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  internal safety net now. It certainly seems that way.
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  They appear to be relying heavily on that external FPD loan financing to keep
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  the long-term planting strategy going, having exhausted their dedicated internal reserve.
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  That really does raise the stakes. Okay, so summing that up.
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  Disciplined pause on logging, hit by asset valuation markdown and an accounting
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  change, but still investing heavily in planting, funded by drawing down debt
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  and using up all their internal strategic reserves.
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  What's the official outlook now from Jawala? Are they expecting things to get better soon?
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  Their official market commentary remains very cautious. The word they used is
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  challenging. They expect market conditions to remain challenging.
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  And does the broader market data back that up? Unfortunately, yes.
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  We have some specific data for the Saab timber sector, where Jwala operates.
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  For the first half of calendar year, 2025, January to June, total exports of
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  timber products from Saabo were down 19% in volume compared to the same period in 2024.
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  Okay, nearly 20% drop in volume. What about value?
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  Even worse, down 24% in volume. Ouch. So falling volumes and falling prices,
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  that definitely validates management's decision to hold back timber in the second
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  half of their fiscal year.
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  Selling into that kind of falling market would have been painful. Absolutely.
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  And they also highlighted a couple of major external pressures that are contributing
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  to these tough conditions. Like what?
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  Firstly, escalating costs due to widespread inflationary pressure.
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  That hits their spending on everything from fuel to fertilizer to labor. Makes sense.
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  And the second? Uncertainties from higher tariffs worldwide.
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  Timber is a global commodity, right? If major buyers like China or the U.S.
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  Or Europe put up higher tariffs, it can really dampen demand and push prices down globally.
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  That feeds right back into those valuation assumptions we talked about earlier.
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  Right. It becomes a vicious cycle.
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  Weak market leads to lower valuations, which impacts reported profit,
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  while external factors like inflation and tariffs keep pressure on. Exactly.
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  And given the loss they recorded and the fact they used up reserves and took
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  on more debt, I assume dividends were off the table. Correct.
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  Consistent with the loss, the board declared that no dividend was declared or
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  recommended for FY 2025.
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  The focus is clearly on investment and navigating these challenges right now.
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  Okay, so let's try and quickly summarize the deep dive here.
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  Jawala's FY 2025 was really a tale of two halves.
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  Strong start masked by a deliberate H2 logging pause due to weak markets.
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  Right, that protected margins but hammered revenue.
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  Then the bottom line loss deepened significantly, driven mainly by that big
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  non-cash markdown of their biological assets. Reflecting the weaker market outlook.
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  And that technical accounting change on the finance costs. But underneath all
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  that, they're still pushing ahead aggressively with their long-term planting strategy.
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  Yeah, investing heavily, funded by drawing down more of their FPD loan and,
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  critically, using up their entire internal strategic reserve cushion.
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  This raises an important question.
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  Well, Jawala is making these large, consistent investments in their trees right now.
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  These trees, their biological assets, are valued using assumptions about the
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  future, like the future log selling price, which, as you said,
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  they just lowered from RM400 down to RM380. Right.
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  Reflecting the current weakness. So given this challenging market,
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  their increased reliance on debt financing, and the fact that their internal
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  reserve buffer is now apparently gone, how long can the company realistically
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  sustain this high-cost,
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  high-investment period before the revenue from those maturing trees absolutely
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  has to start flowing in strongly to offset that rising debt load.
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  That's the crucial tension, isn't it? That balance sheet pressure,
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  the cash burn versus the eventual harvest revenue, the timing of that next major
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  harvest cycle against their current financial structure seems like the key thing to watch.