-  We maintain HOLD on Ta Ann Holdings Bhd with an unchanged fair value of RM3.40/share based on a PE of 13x against FY14F EPS of 26 sen.

-  Ta Ann on Friday announced that it would receive compensation totalling A$28.6mil (inclusive of GST) (RM85mil) from the Australian government for the partial surrender of wood entitlements held under contracts with Forestry Tasmania.

-  Ta Ann would have received the first tranche of A$22.33mil upon the signing of the agreement and the second tranche of A$6.27mil would be received upon it complying with the substantive obligations to the reasonable satisfaction of the government (expected by 1 September 2014).

-  The first tranche would increase the group’s earnings by A$17.24mil (RM51.38mill), net of GST and tax, for FY13F. The total compensation would raise the group’s net assets by A$22.94mil (RM68.36mil).

-  It is conditional upon Ta Ann continuing its operations in Tasmania for at least 5 years until 30 June 2018, failing which it shall refund 25%-90% of the compensation depending on the remaining non-compliant period.

-  Overall, Ta Ann’s peeler wood supply from Forestry Tasmania would be reduced by 40.8% or 108,000 cu m, from 265,000 cu m to 157,000 cu m annually.

-  Under the original 20-year contracts signed in 2006, Ta Ann’s veneer mills at Huon and Smithon were to receive an annual supply of 150,000 cu m and 115,000 cu m, respectively, until 31 December 2027.

-  The new agreement was executed on 12 June 2013 but due to clearance protocols with the Australian government and contract requirements, the executed copy was only cleared and released to Ta Ann on Friday.

-  Ta Ann said it would restructure its Tasmanian operations, including diversifying its markets, and would focus on processing premium eucalyptus plywood products. It said the compensation would sufficiently offset the higher unit fixed cost (given the reduction in billet supply) for the next 10 years.

-  The latest development, which had been anticipated, is positive for the group, as market response and demand would be better stemming from improved perception.

-  Nonetheless, Ta Ann would still face high operating costs. Prospects would hinge on improved market demand and cost reduction strategies. We are keeping our numbers for now.

Source: AmeSecurities