Ta Ann’s future earnings growth will be underpinned by higher contributions from both its plantation and timber divisions as production improves. We project an earnings recovery in 2019E, forecasting an EPS growth rate of 57% yoy. We maintain our SOTPderived TP for Ta Ann at RM2.80, based on an unchanged 8x 2019E PER for the timber division, 10x 2019E PER for the plantation division and 1x BV for the forest plantation. The expected dividend yields for 2018E-20E at 4.0% are also attractive.

Upside Expected for Both Timber…

We expect Ta Ann’s future earnings to grow, underpinned by higher contributions from both its 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 the company to increase its log export quota to 40% (only for logs harvested under this FMU), coupled with more forest lands to be certified by 2019-20. The global shortage for logs and firm demand for its timber products (both log and plywood) should also help to keep prices high.

… and Plantation Divisions

In addition, we expect 2019-20E earnings growth for Ta Ann’s palm-oil plantation division to be driven by rising CPO production (barring no extreme weather conditions) as well as better prices, though partially offset by higher production costs due to an increase in the minimum wage. The current low CPO price, in our opinion, is unlikely to be sustained in 1Q19, when we expect seasonal production declines and world palm-oil consumption will be in excess of production, thus reducing stocks. We think CPO prices could potentially improve in 2019E and onwards to RM2,400-2,500/MT (from an estimated average of RM2,200-2,250/MT for 2018E).

TP Unchanged at RM2.80, Maintain BUY

We make no major changes to our 2018-20E core EPS forecasts for Ta Ann. We expect Ta Ann’s 2019-20E earnings to grow, underpinned by higher contributions from both its plantation and timber divisions as production improves. We maintain our BUY call with an unchanged SOTP-derived TP for Ta Ann at RM2.80, based on an 8x 2019E PER for the timber division (unchanged), a 10x 2019E PER for the plantation division (unchanged) and 1x BV for the forest plantation (unchanged).

Source: Affin Hwang Research - 24 Dec 2018