Steady Start With Plantation as Key Driver

Ta Ann’s 1Q17 core net profit of RM39.7m came in within expectations. However, we have reduced our 2017-19 EPS forecasts slightly by 5-6%, mainly to take into account the recent hike in the hill timber premium. As such, our SOTP-derived TP is now at RM4.57. Maintain BUY rating on Ta Ann.

1Q17 Core Net Profit More Than Doubled to RM40m

Ta Ann reported a higher 1Q17 core net profit of RM39.7m, up 177.5% yoy, on a 39.8% rise in revenue to RM305.6m. The 1Q17 core net profit, after excluding one-off items, was within our and consensus expectations accounting for 29% of our previous 2017 forecast and 31% of the street’s. Ta Ann has also declared an interim DPS of 5 sen (1Q16: 5 sen).

Higher Revenue Mainly Driven by Plantation Division

The stronger 1Q17 revenue was attributable to the timber and plantation segments, which saw their revenues increase by 8.0% and 77.7% yoy, respectively, to RM128.3m and RM177.1m. This was partly due to: 1) higher plywood sales volume of 46,575m3, up 19% yoy; 2) higher CPO sales volume of 44,510 MT, up 32% yoy; 3) higher export log ASP of US$249/m3, up 13% yoy; and 4) higher CPO ASP of RM2,933/MT, up 23% yoy, but was partially offset by: 1) lower export log sales volume of 20,227m3, down 35% yoy, and 2) lower plywood ASP of US$433/m3, down 8% yoy. The EBITDA margin in 1Q17 strengthened to 27% (1Q16: 22%) mainly due to higher CPO prices.

Increase in Log Production Cost

We believe the increase in hill timber premium to RM50/m3 (previously RM0.80/m3), expected to commence on 1st July 2017, will negatively affect Ta Ann’s earnings. We estimate the log cost of production to increase by about 10% to US$130/m3. As such, we have reduced our 2017-19E EPS forecasts by 5-6%. Roughly 50% of Ta Ann’s log production is from hills.

Maintain BUY With a New Target Price of RM4.57

As such, our SOTP-derived 12-month target price has also been lowered to RM4.57 (from RM4.79 previously). We value Ta Ann based on 8x 2017E EPS for its timber division, 15x for its plantation division and 1x BV for its forest plantation. We continue to like Ta Ann for its future plantation earnings prospect given rising matured plantation areas, and FFB and CPO production.

Source: Affin Hwang Research - 24 May 2017