• Downgrade to NEUTRAL from Buy, with new MYR4.00 TP from MYR4.15, 6% downside and 6.4% FY24F yield. While we expect Ta Ann to continue seeing earnings growth in FY24F on the back of higher ASPs coming from plantation and logs segments, this could be offset by lower-than-expected sales volume for plywood, flattish FFB growth target, as well as slightly higher CPO unit costs. As its share price has already run up more than 35% in the last 12 months, we believe valuation is now at a fair level, trading at 8x, within the mid-range of its peers’ 7-10x and its 5-year average of 8x.

• Ta Ann’s log production volume in 1Q24 was at 49,000 cu m (-17% QoQ, -35% YoY), constituting 17% of its target, due to wet weather. Despite the sharp decline, management is still hopeful for output to ramp up in 2H24, maintaining its target of 290k (+6.4% YoY). We believe its forecasts may be too optimistic and therefore cut our log output growth to -6% from +3% for FY24), and +7-10% in FY25-26F vs +9-14% previously. Given the tight supply, this could provide upward pressure to the export logs prices as seen by the 16% QoQ rise in ASP in 1Q24 to USD220/ cu m vs USD190/cu m in 4Q23. We therefore raise our FY24F ASP 5% to USD260/cu m, while maintaining our price assumptions for FY25F-FY26F.

• Plywood remains tough. The segment was in the red in FY23, due to MYR10m write-off for the veneer inventory in Tasmania – driven by declining demand from Japan and a sharp escalation of freight charges. Although this situation remains in 1Q24, as Japan runs down stocks, management expects demand to start picking up in 2H24 as restocking activities resume. We trimmed our FY24F output volume to reflect a 3% decline from +10%, coming from lower logs production. We expect ASPs to remain flattish at USD550-565/cu m in FY24-FY26F, in line with management guidance at USD550/cu m, with 1Q24 prices of USD530/cu m (-15% QoQ). All in, despite the current headwinds, we expect the timber division to remain in the black in FY24-FY26F.

• 1Q24 FFB production dropped 35% QoQ and flattish YoY, caused by wet season in Sarawak. Consequently, Ta Ann has revised its FY24F FFB production growth target to 5% from 10-12% but expects production to rebound significantly in 2H24 with drier seasons and better fertiliser application in FY23. Hence, we cut our FY24 FFB growth expectations to a more conservative 3% while keeping our FFB growth assumptions of 5-6% for FY25-FY26F. We also marginally increase our CPO unit cost to MYR2,670/tonne from MYR2,600/tonne to reflect more aggressive manuring activities in FY24F, above Ta Ann’s guidance of MYR2,400/tonne.

• We cut FY24F earnings by 4%, keeping our assumptions for FY25-FY26F in view of lower FY24F logs and FFB production growth, and higher CPO costs.

• We downgrade to NEUTRAL, with a new MYR4.00 TP based on an unchanged 10x FY24F P/E, after imputing a 24% ESG discount based on its ESG score of 1.8. We believe valuation is now fair, as Ta Ann is trading at 8x FY24F P/E, at the mid-range of its peers’ 7-10x.

Source: RHB Securities Research - 3 May 2024