Excluding foreign exchange (FX) gain of RM4.9m and gain on disposal of PPE (RM0.2m), Ta Ann’s 1HFY23 core earnings tumbled 63% YoY to RM81m, dragged by weaker contributions from both the plantation and timber segments. The results were below our and consensus forecasts, making up only 40% and 44% of full-year numbers, respectively. Despite the weakerthan-expected results, we keep our numbers unchanged as we expect to see a strong earnings recovery in 2H on the back of stronger palm oil prices amid the high production season. Maintain Outperform call with an unchanged SOP-based TP of RM4.30. No dividend was declared during the quarter.

• Dragged by both plantation and timber segments. The weaker sales of RM385.2m were attributed to a decline in both timber (YoY: -33%) and plantation (YoY: -43%) segments. 2QFY23 average CPO selling price sank from RM6,537/mt to RM3,735/mt while 2QFY23 FFB production slipped 12% YoY to 142,367mt. 1HFY23 OER was slightly higher at 19.57% while 2QFY23 FFB yield stood at 3.33mt/ha.
  
  Timber sales weakened 33.4% to RM76.6m as sales from plywood halved to RM42m, partially offset by stronger log sales, up 37.1% YoY. 2QFY23 average log export price slipped 9.6% YoY to USD254/cu m while plywood price dropped 23% YoY to USD557/cu m. Log export volume jumped 58.5% YoY to 28,525 cu m while plywood exports volume tumbled 41.6% YoY to 13,621 cu m.

• 2QFY23 core earnings dipped 69% YoY to RM41m, mainly attributed to both timber (-69%) and plantation (-67%) segments. 2QFY23 CPO production cost remained at RM2,200/mt (PK-credit: RM186/mt) and 1HFY23: averaged at RM2,300/mt. Timber earnings sank to RM8.3m, dragged by plywood-related losses from Tasmania though log-based earnings jumped 35% YoY to RM11.5m. Earnings contributions from 31%- owned Sarawak Plantation and JV-owned refinery more than halved to RM4.4m.

• Outlook. Due to the lag effect of slower-than-expected fertilization progress in the last 2 years, management sees potential downside risk of 10%-12% to its earlier FFB production target of 815k mt. It also indicated that 64% of the FFB production target will come through in 2H. Fertilizer application was on track for the 1H, reaching 50% of full-year target while fertilizer cost continues sliding. Nitrate of Potassium (NOP) cost, which makes up 60% of total fertilizer application, has almost halved to RM2,000/mt. For the full-year, management is looking at lower CPO production cost of RM2,100/mt.
  
  In view of a surge in FFB production for 2H coupled with stronger CPO prices, management expects to sees strong earnings recovery for the plantation segment in 2H. It plans to replant 1,500ha on peat land (replanted 600ha in the 1H) and another new planting of 1,000ha will be carried out on the JV-owned land with the Sarawak state.
  
  On the timber segment, it has maintained its log exports target of 100k cu m but lowered its plywood sales volume target from 108k cu m to 80k cu m due to overstocking by Japanese customers. Lastly, it has allocated RM67m for capital expenditure (capex), with RM36m for plantation development, RM7m for reforestation and remaining RM24m for upkeep and maintenance.

Source: PublicInvest Research - 1 Sept 2023