• Ta Ann’s 6M20 core profit of RM21.3m (+93% yoy) was within expectations. Higher plantation profit was driven by stronger CPO prices in 6M20
• We expect better 2H20 earnings from plantation (higher FFB and CPO production as we enter peak production period and better demand in 2H20) and timber (demand to recover as countries reopen after strict lockdowns) segment
• We make no changes to Ta Ann’s 2020-22E core earnings, and reaffirm our BUY rating and TP of RM3.20

Sequentially Weaker Due to Timber Division

Sequentially, Ta Ann’s 2Q20 revenue declined by 1.5% qoq to RM248.7m, while PBT dipped 0.2% qoq to RM20.5m (2Q20 includes a gain from the changes in fair value of biological assets of RM3.2m as compared to a loss of RM2.9m in 1Q20). While profit from the plantation division was higher, the timber segment was loss making as export log prices and sales volume were down qoq, a result of the COVID-19 pandemic where major buyers, especially India, imposed tight lockdowns. After adjusting for one-off items, Ta Ann’s core net profit was lower by 21.2% qoq to RM9.4m.

6M20 Core Net Profit at RM21.3m – Broadly Within Expectations

Ta Ann 6M20 revenue was higher at RM501.3m, up 26.9% yoy given the stronger plantation (+41.8% yoy) and timber (+2.2% yoy) divisions. Higher plantation revenue was due to higher CPO ASP of RM2,421/MT in 6M20, up 27% yoy from RM1,906/MT in 6M19 and CPO sales volume. The increase in the timber division was contributed by higher sales volume for logs and plywood by 31% and 16.7% yoy, respectively to 46,199m3 and 42,020m3 but partially offset by a decline in ASPs for export logs and plywood by 22.6% and 9.6% yoy, respectively to US$191/m3 and US$479/m3. Ta Ann’s PBT increased by 78.5% yoy to RM41.1m due to higher profits from its plantation division given higher CPO prices but partially dragged by weaker performance at its timber business due to weaker timber products prices. The 6M20 core net profit, after excluding one-off items, was higher by 93% yoy to RM21.3m, although accounting only for 26.3% of our full -ear estimates is deemed to be within expectations as we expect 2H20 to be stronger underpinned by improvement in plantation and timber divisions.

Expecting Better Performances in 2H20

Ta Ann’s plantation profits in 2H20 are expected to be driven by the continuous improvement in FFB and CPO production as we enter the peak production period towards Oct/Nov. Also, we expect the timber division performance to improve in 2H20, especially at its logs sub-division, as major importing countries such as India and Vietnam have started to resume their business activities again.

Reaffirm BUY Rating on Ta Ann With a TP RM3.20

Overall, we make no changes to our 2020-22E core EPS and our CPO ASP assumptions remain at RM2,350-2,500/MT. We reaffirm our BUY rating on Ta Ann and DCF-derived 12-month target price of RM3.20. Key downside risks to our BUY rating include: 1) much weaker economic growth leading to a higher consumption of vegetable oils; 2) a sustained decline in the CPO price; 3) lower-than-expected FFB and CPO production; 4) lower-than-expected log production and selling prices; and 5) unfavourable changes in government policies.

Source: Affin Hwang Research - 1 Sept 2020