Ta Ann’s 1H17 core net profit of RM73m came in largely within expectations. However, we have cut our 2017-19 EPS forecasts by 5- 25%, mainly to take into account the recent cut in export quota, lower log production and higher cost of production assumptions for the timber division. After rolling forward our valuation basis to 2018E, our SOTP-derived TP for Ta Ann is now lower at RM4.25 due to our earnings cuts. We reiterate our BUY call.

1H17 Core Net Profit Up 74.4% Yoy to RM73m

Ta Ann reported a stronger 1H17 revenue of RM571.9m, +17.3% yoy, given higher plantation earnings, but this was partially offset by lower contribution from the timber segment. The EBITDA margin strengthened to 29.7% in 1H17 from 22.7% in 1H16 due to a better margin from its plantation division. Ta Ann’s core net profit, after excluding one-off items, increased by 74.4% yoy to RM73m. This was largely within our and consensus expectations, accounting for 55.7% of our previous 2017 forecast and 58.5% of the street’s.

Revenue Down Sequentially on Lower Timber Contribution

Sequentially, Ta Ann’s 2Q17 revenue decreased by 12.8% qoq to RM266.4m, attributable to the respective revenue declines at the timber and plantation divisions of 28.4% to RM91.9m and 1.5% to RM174.4m, which were underpinned by: 1) the respective declines in log and plywood sales volume of 28% and 31% to 14,625m3 and 32,220m3; and 2) a 7% qoq lower CPO ASP of RM2,736/MT. But this was partially offset by: 1) increases in the log and plywood ASPs of 12% qoq to US$278/m3 and 4% qoq to US$449m3 respectively; and 2) a 10% higher CPO production of 48,834 MT. Surprisingly, Ta Ann has declared a second interim DPS of 5 sen, bringing the 1H17 DPS to 10 sen (1H16: 5 sen) – above expectations.

Cut in Log Production and Export Quota, Higher Costs of Production

Despite the 1H17 results coming in within our expectation, we have cut our 2017-19 EPS forecasts by 5-25%, mainly to take into account the recent cut in export quota to 20% (from 30% previously), lower log production assumption, and higher cost of production assumptions for the log and plywood divisions. But this is partially mitigated by an increase in the log ASP assumption by 8% yoy to US$270/m3 in FY17-19E. We believe it will be a challenging environment going forward for the timber division given the increase in hill timber premium as well as the reduction in export quota. Nevertheless, we believe that the likely increase in plantation division earnings would be able to offset the drop in timber division earnings.

Source: Affin Hwang Research - 23 Aug 2017