Ta Ann Holdings - Stronger Earnings Prospects in 2H

Date: 29/08/2019

Source  :  PUBLIC BANK
Stock  :  TAANN       Price Target  :  2.98      |      Price Call  :  BUY
        Last Price  :  2.63      |      Upside/Downside  :  +0.35 (13.31%)

Ta Ann’s 1HFY19 core profit of RM11.2m (-35.3% YoY) were below our and consensus expectations, making up only 12.5% and 16%, respectively. Despite seeing a strong turnaround in timber business, palm oil segment was badly affected by a decline in CPO prices and smaller growth in FFB production as heavy rainfall has affected the harvesting and logistics activities. We lowered our FY19 earnings forecasts by 34% but made no changes to our FY20-21 numbers given the recent recovery in both CPO prices and FFB production while timber segment has received a big boost with the recent recognition of second forest management unit, Raplex estate, which should bump up the group’s annual log export volume by 13,800 cu m or about 6.7% YoY. No dividend was declared for the quarter. We maintain Outperform call with an unchanged TP of RM2.98 as we expect strong earnings improvement in FY20F, trading at only 9x forward PER.

  • Driven by stronger timber sales (QoQ: +20.7%, YoY: -8.4%). The weaker group sales of RM216m were mainly dragged by a decline in both plantations (-9.9%) and timber (-5.8%) segments. Plantation revenue was hit by a decline in CPO selling prices, down 17% YoY to RM1,887/mt despite FFB production climbed 2% YoY to 170,863mt. (1H FFB production made up only 38% of our expectation) Meanwhile, timber sales softened by 5.8% YoY to RM81.5m, dragged by weaker plywood sales (-18.8% YoY) despite logging sales jumped 61% YoY RM21m. Average export log price fell 34% YoY to USD242/cu m, due to the sale of cheaper species and stiffer competition from PNG and Solomon Island while average plywood price softened by 2% YoY to USD543/cu m. Sales volume of export logs soared 155% to 19,789 cu m while plywood fell 14% YoY to 23,759 cu m as it was hampered by port congestion issue in Japan. It is currently experiencing an increase of backlog for more than 2 months.
  • 2QFY19 core earnings (QoQ: -44.4%, YoY: -68%). The Group’s earnings tumbled 68% YoY to RM4m, as a decline in plantation earnings was partly offset by stronger earnings from timber segment. Logging business contributed a PBT of RM4m while plywood registered a small loss of RM0.3m. On the other hand, plantation earnings plunged 69.8% YoY to RM6m, as pre-tax earnings margin fell from 13.3% to 4.4% due to a decline in CPO prices and higher production cost. Meanwhile, its 30.4%-owned Sarawak Plantation contributed small earnings of RM0.7m.
  • Management guidance. Operating cost for logging segment stood at USD120-130/cu m while plywood was higher at USD540/cu m. All-in CPO production cost was also higher at RM1,800/mt (FFB cost: RM330/mt) due to a decline in PK credit and higher fertilizer cost. Management has maintained its FFB production growth of 10% YoY for FY19, implying that 2H will see an 18% YoY growth. On the timber segment, management targets an increase of 26% YoY in log supplies, contributed by plantation forests and certified natural forests. Log export volume is expected to continue with the strong growth, led by higher export quota.

Source: PublicInvest Research - 29 Aug 2019

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