Weak Start to the Year, Below Expectations

Ta Ann’s 1Q18 core net profit of RM5.2m (-85.8% yoy) came in below our and consensus expectations. The variance was mainly due to weaker-than-expected contributions from both the timber and plantation divisions, given the production in 1Q18 was badly affected by the adverse weather conditions in certain parts of Sarawak. We have cut our 2018-20E EPS by 6-18% to account for the weaker-thanexpected 1Q18 results. We lower our SOTP-derived TP for Ta Ann to RM2.82 and downgrade from BUY to HOLD.

1Q18 Core Net Profit at RM5.2m, Below Expectations

Ta Ann registered a weaker 1Q18 revenue of RM214.9m (-30% yoy) given lower contributions from the plantation and timber divisions. Revenues from the timber and plantation divisions fell by 31.9% and 28.1% yoy to RM87.5m and RM127.3m respectively. The weaker revenue was underpinned by: 1) a decline in plywood and export log sales volumes by 33% and 71% yoy, respectively; 2) both FFB and CPO sales volume declining by 11% yoy; and 3) a lower CPO ASP (down 19% yoy) of RM2,380/MT. The production for 1Q18 has suffered badly from the adverse weather conditions in certain parts of Sarawak. The EBITDA margin weakened to 14.3% in 1Q18 from 27% in 1Q17 due to weaker margins at both its plantation and timber divisions. Ta Ann’s 1Q18 core net profit, after excluding one-off items, declined by 85.8% yoy to RM5.2m. This was below expectations, accounting for 4.6% of our previous and 4.2% of the street’s 2018 estimates, respectively. The variance was mainly due to lower-than-expected log, FFB and CPO production pushing the costs of production higher. Ta Ann has declared an interim DPS of 5 sen (1Q17: 5 sen).

Downgrading to HOLD With 12-month TP of RM2.82

We have cut our 2018-20 core EPS forecasts by 6-18% mainly to account for the weaker-than-expected 1Q18 results. We believe that the environment will be challenging for the timber division going forward given the declining natural forest resources, and that the plantation division’s earnings growth would only be able to partially offset the drop in timber division earnings. Due to our earnings cut, our SOTP-derived TP for Ta Ann is now at RM2.82 (from RM4.25), based on an unchanged 8x 2019E PER for the timber division, a 10x 2019E PER for the plantation division (a 30% discount to mid-sized plantation companies’ average PER of 15x) and an unchanged 1x PBR for the forest plantation. We downgrade Ta Ann to a HOLD rating (from BUY previously) given the limited upside to our revised TP.

Source: Affin Hwang Research - 25 May 2018