Ta Ann’s 2019 core net profit of RM60m (-4% yoy) came in largely within our and consensus expectations. The lower profit was due to the plantation division given weaker CPO prices in 2019, but this was partially mitigated by a higher CPO sales volume. We have trimmed our 2020/21 core EPS forecasts by 4.7% / 4.3%, mainly to account for lower contribution from the timber division given the challenging operating environment (as for other timber companies). After the earnings revisions, our SOTP-derived 12-month TP is lowered to RM3.60 (from RM3.81). We maintain our BUY call, as we remain optimistic on the company’s plantation earnings prospects underpinned by its rising CPO production and prices.

2019 Core Net Profit at RM60m – Within Expectation

Ta Ann’s 2019 revenue was lower at RM944.6m, down 2.3% yoy given the lower timber division contribution (-23.1% yoy) that was partially mitigated by higher revenue from the plantation division (+11.4% yoy). Revenue from the timber division was impacted by a 32% yoy decline in plywood sales volumes to 81,800m3 coupled with lower ASPs for export logs and plywood, down 4% and 4% yoy, respectively to US$220/m3 and US$530/m3 . Higher revenue from plantations was due to the higher CPO sales volume of 251.6k MT in 2019, up 23% yoy. Ta Ann’s PBT declined by 28% yoy to RM86.7m in 2019 due to lower profits from the plantation division given the weaker CPO price (2019 CPO ASP of RM2,052/MT vs RM2,128/MT in 2018). The 2019 core net profit, excluding one-off items, was 4% lower yoy at RM60m. This was within our and consensus expectations, accounting for 98% of both forecasts.

Stronger Qoq Core Net Profit at RM25.8m

Ta Ann’s 4Q19 revenue increased by 5.2% qoq to RM281.7m, while PBT (which included PPE written off and fire insurance claim) dropped 68.7% qoq to RM15.2m. The increase in 4Q19 revenue was partly attributable to higher CPO prices despite lower sales volumes and an increase in the plywood sales volume. After adjusting for one-off items, Ta Ann’s core net profit was higher by 10.9% qoq to RM25.8m.

Maintain BUY But With a Lower TP of RM3.60

We have trimmed Ta Ann’s 2020-21 core EPS forecasts by 4.7% / 4.3%, mainly to account for lower contribution from the timber division given the challenging operating environment (similar for other timber companies, but we note that its timber division remained profitable). We also introduce our 2022 forecasts. After the earnings revisions, our SOTP-derived TP is lowered to RM3.60 (from RM3.81), based on an unchanged 8x 2020E PER for its timber division and a DCF valuation for its plantation division. Nevertheless, we maintain our BUY call on Ta Ann, as we are still optimistic on the company’s plantation earnings prospects underpinned by its rising CPO production and prices.

Key Risks

Key downside risks include: 1) lower consumption of vegetable oils; 2) protracted trough in CPO prices; 3) lower FFB and CPO production; 4) lower log production; and 5) changes in government policies.

Source: Affin Hwang Research - 2 Mar 2020