Ta Ann’s 9M18 core net profit declined to RM48.8m (48.6% yoy) mainly due to lower contribution from both the timber and plantation divisions. Nevertheless, this was broadly within our expectations. Of more significance is the 91% qoq jump in 3Q18 core earnings on the back of higher timber and plantation earnings. The latter is surprising considering weak peer performance. Going forward, we expect earnings to grow underpinned by higher contribution from both the plantation and timber divisions as production improves. We maintain our SOTP-derived TP for Ta Ann at RM2.80, based on an unchanged 8x 2019E PER for the timber division, a 10x 2019E PER for the plantation division and an unchanged 1x PBR for the forest plantation. On valuation grounds, we upgrade Ta Ann to a BUY rating (upside of 37% to our latest TP). The expected dividend yields for 2018E-20E at 5% are also attractive.

9M18 Core Net Profit at RM48.8m, Down 48.6% Yoy

Ta Ann registered 9M18 revenue of RM724.6m, down 17.7% yoy given the lower plantation and timber divisions’ contribution. The timber and plantation divisions revenue were down by 14.2% and 19.7% yoy, respectively, to RM276m and RM321.8m. The weaker revenue was underpinned by: 1) a decline in plywood and export log sales volumes by 19% and 51% yoy, respectively, to 89,924m3 and 25,790m3; 2) a decline in FFB sales volume by 3% yoy to 532.4k MT; and 3) lower ASP for CPO by 19% yoy to RM2,235/MT. The EBITDA margin weakened to 21.7% in 9M18 from 28.4% in 9M17 due to a weaker margin from both its plantation and timber divisions. Ta Ann’s 9M18 core net profit, after excluding one-off items, declined by 48.6% yoy to RM48.8m, accounting for 72% of our and 71% of street’s 2018 estimates, respectively. We deem this to be in line with our expectations.

Sequentially Higher ASP and Sales Volume

On a sequential basis, Ta Ann’s 3Q18 revenue increased by 17% qoq to RM274.9m, attributable to higher sales volume from export logs (+57% qoq), CPO (+27% qoq) and FFB (+42% qoq) as well as higher average selling price for plywood product (+2% qoq). The 3Q18 PBT and core net profit increased >100% and 90.7% qoq, respectively, to RM49.3m and RM28.6m.

Upside for both the plantation and timber divisions

We expect future earnings to grow underpinned by higher contribution from both the plantation and timber divisions. We expect log production as well as 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 them to increase their log exports quota from 20% to 40% (only for logs harvested under this forest management). Also, we believe FFB and CPO production to increase going forward as FFB yield improves and matured plantation hectarage rises.

TP Unchanged at RM2.80, Upgrade to BUY

We make no major changes to our 2018-20E core EPS forecasts for Ta Ann post the 9M18 results. We maintain our SOTP-derived TP for Ta Ann at RM2.80, based on an unchanged 8x 2019E PER for the timber division, a 10x 2019E PER for the plantation division and an unchanged 1x PBR for the forest plantation. Based on valuation, we upgrade Ta Ann to a BUY rating (upside of 37% to our latest TP) from HOLD previously.

Key Risks

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

Source: Affin Hwang Research - 26 Nov 2018