Ta Ann - Better Quarters to Come With Higher CPO Prices

Date: 21/11/2019

Source  :  AffinHwang
Stock  :  TAANN       Price Target  :  3.20      |      Price Call  :  BUY
        Last Price  :  3.22      |      Upside/Downside  :  -0.02 (0.62%)

Ta Ann reported a stronger quarter, with 3Q19 core net profit surging >100% qoq to RM23.2m, on the back of higher sales volume and prices of CPO. While 9M19 earnings account for 56% of our full-year forecast, we deem the results to be within our expectations, as we expect 4Q19 to be another strong quarter with higher CPO prices but partially mitigated by lower production. We maintain our 2019 core EPS forecasts but raise our 2020/2021 core EPS forecasts by 27.9%/12.2% on a higher CPO ASP assumption. After our upward earnings forecast revisions, we raise our SOTP-derived Target Price for Ta Ann to RM3.20. We maintain our BUY rating as we like Ta Ann for its plantation earnings prospects given rising CPO production and price expectations.

9M19 Core Net Profit at RM34m – Largely Within Expectations

Ta Ann’s 9M19 revenue was lower at RM662.9m, down 9% yoy given lower plantation and timber division contributions. Revenues from the timber and plantation divisions were down by 18.7% and 3% yoy, respectively, to RM224.3m and RM438.4m. The weaker revenue was underpinned by: 1) a decline in plywood sales volumes by 35% yoy to 58,570m3; and 2) lower ASPs for CPO and export logs by 13% and 33% yoy, respectively to RM1,944/MT and US$232/m3. Ta Ann’s PBT declined by 3.7% yoy to RM71.5m in 9M19 due to lower profits from the plantation division but was partially mitigated by a better contribution from the timber division. The 9M19 core net profit, after excluding one-off items, was lower by 19.4% yoy to RM34m. We deem the results to be within our expectations, despite accounting for only 56% of our 2019 core earnings estimate, as we expect 4Q19 to be another decent quarter with higher CPO prices but partially mitigated by lower production.

Sequentially Stronger Earnings

Sequentially, Ta Ann’s 3Q19 revenue increased by 24% qoq to RM267.9m, while PBT surged >100% qoq to RM48.5m. The improvement in 3Q19 performance was mainly attributable to higher sales volume and prices for CPO but was partially offset by the weaker timber product prices. The EBITDA margin also improved to 27.3%, up 9.5 ppt, given the better earnings from the plantation division. After adjusting for one-off items, Ta Ann’s core net profit increased by >100% qoq to RM23.2m

Maintain BUY, TP Raised to RM3.20

We maintain Ta Ann’s 2019 core EPS forecast but raise our 2020/2021 core EPS forecasts by 27.9%/12.2% as we raise our CPO price assumption for 2020-2021 to RM2,450-2,550/MT from RM2,250- 2,450/MT previously. The increase in our CPO price assumptions is underpinned by the stronger demand growth for palm-oil products (especially for food and energy industries) as compared to the production growth rate. As such, our SOTP-derived TP is now lifted to RM3.20 (from RM2.90), based on an unchanged 8x 2020E PER for its timber division and a DCF valuation for its plantation division. Maintain BUY rating on the stock. In our view, Ta Ann’s prospects are underpinned by its rising CPO production and a recovery in CPO prices.

Key Risks

Key downside risks include: 1) lower consumption of vegetable oils; 2) protracted trough in CPO prices; 3) lower FFB and CPO production; 4) lower log production; and 5) changes in government policies.

Source: Affin Hwang Research - 21 Nov 2019

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