TA ANN HOLDINGS - Expecting A Bumper 4Q19

Date: 21/11/2019

Source  :  PUBLIC BANK
Stock  :  TAANN       Price Target  :  3.27      |      Price Call  :  BUY
        Last Price  :  3.30      |      Upside/Downside  :  -0.03 (0.91%)

Ta Ann’s 9MFY19 core profit of RM35.2m (YoY: -27.6%) fell below expectations, making up only 60% and 61% of our and the street full-year expectations. Nevertheless, riding on the current CPO price rally, we believe there will be a strong catch-up in 4Q earnings. No dividend was declared for the quarter. We maintain Outperform call with an unchanged TP of RM3.27. Ta Ann is one of our top picks as we like its i) young age profile, ii) solid balance sheet and iii) attractive valuations with an unwarranted forward PER of 9.9x.

  • Weighed by softer timber sales (QoQ: +24%, YoY: -3.1%). The weaker group sales of RM268m were attributed to lower contribution from the timber segment (-25.6%) despite stronger plantation sales (+10.3%). Timber sales softened to RM75.9m as plywood sales halved to RM40m despite logging sales doubling to RM31m. Average 3QFY19 export log price dropped 32.5% YoY to USD218/cu m, due to the sale of cheaper species and stiffer competition from PNG and Solomon Island while average plywood price softened by 5.5% YoY to USD534/cu m. Sales volume of export logs soared 202% YoY to 36,883 cu m while plywood sales tumbled 47% YoY to 16,550cu m as it continued to be hampered by port congestion issues and softer demand in Japan. Average CPO selling price was down by 5.3% YoY to RM1,993/mt while FFB production climbed 6.3% YoY to 247,070mt. (9M FFB production made up 68% of our full-year expectation)
  • 3QFY19 core earnings (QoQ: >100%, YoY: -23.9%). The Group’s earnings dipped 23.9% YoY to RM23.6m, as a decline in timber earnings was partly offset by stronger earnings from plantation segment. Logging pre-tax earnings tripled to RM11.5m while plywood made a loss of RM6.5m. On the other hand, plantation earnings rose 7.3% YoY to RM42.6m, driven by the new milling plant. Meanwhile, earnings contribution from its 30.4%-owned Sarawak Plantation weakened to RM1.5m.
  • Management guidance. Operating cost for logging segment stood at USD115/cu m while plywood was higher at USD553/cu m (vs 2QFY19: USD540/ cu m). All-in CPO production cost was also higher at RM1,850/mt (vs 2QFY19: RM1,800/mt) due to a decline in PK credit and higher spending on the third party CPO purchase following the commencement of the third mill. Management has lowered its FFB production growth forecast to 2% from the earlier expectation of 10%. Nevertheless, we think the weaker-than-expected FFB production should be cushioned by the stronger-than-expected CPO prices. Based on our sensitivity analysis, for every RM100/mt increase in CPO price, it could potentially contribute an additional RM13m-16m to the Group’s bottomline. The new mill, which is located in Selangau, has been operational since Aug and it is currently running at the maximum capacity of 45mt/hour.

Source: PublicInvest Research - 21 Nov 2019

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