Ta Ann Holdings Berhad - Dragged By Plantation

Date: 29/08/2019

Source  :  KENANGA
Stock  :  TAANN       Price Target  :  2.20      |      Price Call  :  HOLD
        Last Price  :  3.25      |      Upside/Downside  :  -1.05 (32.31%)

1H19 CNP of RM12.7m came in below our/consensus expectations at 20%/18%, due to: (i) lower-than-expected average CPO price, (ii) lower-than-expected selling prices for export logs and plywood, and (iii) higher effective tax rate. No dividend was announced, as expected. Lower FY19- 20E CNP by 49-18% on lower selling prices of export logs and plywood, as well as a higher effective tax rate. Maintain MP with a lower TP of RM2.20 (from RM2.40).

1H19 below expectations. TAANN’s 2Q19 Core Net Profit (CNP*) came in at RM4.8m, bringing 1H19 CNP to RM12.7m (-39% YoY; -40% QoQ), which is below both our/consensus’ full-year forecast at 20%/18%. The deviation came from: (i) lower-than-expected average CPO prices at RM1,909/MT (vs. our CY19E: RM2,000/mt), (ii) lower than-expected export logs and plywood prices, as well as (iii) higher than-expected effective tax rate (ETR). Meanwhile, 1H19 FFB output accounted for 47% of full-year output. No dividend was declared, as expected.

Plantation remains the drag. YoY, 1H19 CNP declined (-39%) to RM12.7m attributed to: (i) decline in PBT from plantation division (- 66%), as lower average CPO prices fell (-18%) to RM1,909/MT, masking 15% FFB output increase, and (ii) higher ETR of 37.7% (+13.7ppt). The drag in its plantation division was partially offset by its timber division, which turned around mainly due to a sharp increase in export logs volume (+160%), attributed to its Forest Management Units (FMU) certification, which increased export quota to 40% (from 20%). QoQ, 2Q19 CNP fell to RM4.8m (-40%), mainly due to: (i) lower average selling prices for its export logs (-4%), plywood (-4%) and CPO (-2%), and (ii) higher minority interest.

FFB production to pick up. We expect to see improvement in 2H19 plantation contribution, driven by seasonally higher FFB production, and as CPO average inches closer to our CY19 forecast of RM2,000/MT. Meanwhile, we gathered that the second phase of TAANN’s Forest Management Unit (FMU) certification (Raplex and Pasin) over a total forest land of 196.2k ha is on-going, and is expected to be completed by 1H20. Upon completion, it will have a total forest land of 345.9k ha, allowing it to export 40% (previously 20%) of logs harvested under the certified concession area.

Lower FY19-20E CNP by 49-18% to RM33-71m as we reduce: (i) ASP for export logs (-17%) and plywood (-4%) to USD250/m3 and USD530/m3, respectively, and adjust the effective tax rate to 33% (from 30%).

Maintain MARKET PERFORM with a lower Target Price of RM2.20 (from RM2.40) based on CY20E PER of 14.0x. Our Fwd. PER of 14x is based on -1.0SD, in line with planters under our coverage’s range of (- 2.0SD to 0.5SD). Note that among our smaller planters, TAANN is one of the more profitable ones even under a depressed CPO price outlook.

Risks to our call include: (i) lower/higher-than-expected CPO prices, (ii) further limits on log exports, (iii) weaker/stronger-than-expected FFB production.

Source: Kenanga Research - 29 Aug 2019

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