Ta Ann has been focusing on improving SPB’s plantation operation as well as its own CPO production. The group has managed to improved production and taken cost saving measures to keep the palm oil division profitable despite the drop in CPO prices. Ta Ann’s timber division has seen some signs of recovery in log production volume and demand for timber products has remained healthy, in our view. No changes made to our 2019-21E core EPS forecasts for Ta Ann. Maintain our BUY rating with an unchanged TP of RM3.25.

Transforming SPB to Improve Its Plantation Operation

Ta Ann owns a 30.4% stake in SPB (Sarawak Plantation Berhad), an oil palm plantation company in Sarawak. In 2018, SPB underwent a transformation plan, with a change in management, strengthening of standard operating procedures, upgrading of facilities, intensification of estate enhancement and resource rationalisation. As a result, SPB’s FFB production in 5M19 has increased by 17.9% yoy to 98.5k MT. We expect SPB to contribute positively to Ta Ann’s earnings (contributed c. 17% to Ta Ann’s 1Q19 net profit).

Ta Ann’s Own CPO Production Also Expected to Increase

We believe as more of Ta Ann’s plantation areas reach prime age, improving FFB yield and CPO OER, this will contribute to future growth in FFB and CPO production. However, the palm oil division’s performance is dependent on CPO prices, which are expected to be volatile in the current challenging market. We maintain our CPO ASP assumption at RM2,200- 2,500/MT for 2019-21E.

Timber Division Seen Some Signs of Recovery

Ta Ann’s log production volume has improved after the first phase of the forest sustainability management exercise was completed. Demand for Ta Ann’s timber products has remained healthy, but the change in type of wood composition being sold has affected log and plywood selling prices.

Maintain BUY Rating and TP of RM3.25

We make no changes to our 2019-21E core EPS for Ta Ann. Our SOTPderived TP is maintained at RM3.25, based on an unchanged 8x PER on our 2020E EPS for the timber division and a DCF valuation for the plantation division. We maintain our BUY rating as we like Ta Ann for its plantation earnings prospect given the rising mature plantation area, and improving FFB yield and OER.

Source: Affin Hwang Research - 8 Jul 2019