Ta Ann’s 1H18 core net profit declined by 71.5% yoy to RM20.2m, mainly due to lower contribution from both its timber and plantation divisions. We deem this to be in line with our expectations as we expect a stronger 2H18, underpinned by higher FFB and CPO production with lower production costs as well as higher log production and prices. We maintain our 2018 core EPS forecast but raise our 2019-20 core EPS forecasts by 11-13% mainly to account for higher contribution from the logging division going forward. As such, our SOTP-derived TP for Ta Ann is lifted to RM2.80. We maintain our HOLD rating on the stock.

1H18 Core Net Profit at RM20.2m, Largely Within Our Expectations

Ta Ann registered 1H18 revenue of RM449.7m, down 21.4% yoy given lower contribution from the plantation and timber divisions. The timber and plantation divisions’ revenues were down by 21% and 21.6% yoy, respectively, to RM173.9m and RM275.6m. The weaker revenues were underpinned by: 1) declines in plywood and export log sales volumes by 24% and 61% yoy, respectively, to 58,949m3 and 13,556m3; 2) a decline in the FFB sales volume by 10% yoy to 300.1k MT; and 3) a lower CPO ASP by 17% yoy to RM2,325/MT. The production for 1H18 suffered badly from the effect of the adverse weather condition in certain parts of Sarawak. The EBITDA margin weakened to 18.4% in 1H18 from 29.7% in 1H17 due to softer margins at both its plantation and timber divisions. Ta Ann’s 1H18 core net profit, after excluding one-off items, declined by 71.5% yoy to RM20.2m, accounting for 30% of our 2018 estimate and 25% of the street’s. We deem this to be in line with our expectations as we expect a stronger 2H18 underpinned by higher FFB and CPO production with lower production costs as well as higher log production and prices.

Sequentially Higher ASP and Sales Volume

On a sequential basis, Ta Ann’s 2Q18 revenue increased by 9.3% qoq to RM234.9m, attributable to higher sales volumes of export logs (+34% qoq), CPO (+24% qoq) and FFB (+20% qoq) as well as higher average selling prices for plywood products (+8% qoq) and export logs (+4% qoq). The 2Q18 PBT and core net profit increased >100% qoq to RM22.6m and RM15m, respectively.

TP Raised to RM2.80, Maintain HOLD Rating

We maintain our 2018 core EPS forecast but raise our 2019-20 core EPS forecasts by 11-13% mainly to account for higher contribution from the logging division going forward. We expect log production as well as the export log sales volume to be higher in 2019-20E due to Ta Ann’s new Certificate for Forest Management for its subsidiary, Tanjong Manis Holdings Sdn Bhd, under the Malaysian Timber Certification Scheme (MTCS) which allows companies to increase their log export quota from 20% to 40% (only for logs harvested under this forest management). Due to our earnings forecast revisions, our SOTP-derived TP for Ta Ann is lifted to RM2.80 (from RM2.59) based on an unchanged 8x 2019E PER for the timber division, an unchanged 10x 2019E PER for the plantation division and an unchanged 1x PBR for the forest plantation. We maintain our HOLD rating on Ta Ann (7.7% upside potential to our new TP).

Key Risks

Key upside/downside risks include: 1) stronger/weaker economic growth leading to a higher/lower consumption of vegetable oils; 2) a sustained rebound/plunge in the CPO price; 3) higher/lower-than-expected FFB and CPO production; 4) higher/lower-than-expected log production; and 5) changes in government policies.

Source: Affin Hwang Research - 30 Aug 2018