Ta Ann's FY12 core earnings of 67.1m (-58.6%  y-o-y)  came  within  expectations  as stronger  timber  and  CPO  sales  volume  were  unable  to  offset  substantially  weaker selling  prices.  Its  timber division  recorded  losses  amid  poor  plywood  prices  and a RM13m  impairment.  Ta  Ann  is  turning  into  a  quasi-plantation  company  as  its plantation  division  is  likely  to  be  its  key  driver  for  growth  moving  forward.  Our expectations are for FFB production to grow by 23.1% y-o-y and 15.9% y-o-y in FY13 and FY14. Upgrade to NEUTRAL with an unchanged FV of RM3.40.  

Within expectations. Ta Ann posted 4QFY12 revenue of RM797.4m (-0.6% y-o-y, -10.6% q-o-q)  and  headline  earnings  of  RM3.1m  (-89.5%  y-o-y,  -89.9%  q-o-q)  despite  stronger sales  volume  for  both  its  timber  and  oil  palm  divisions  as  weak  CPO  and  timber  prices dragged  down  profitability.  Stripping  out  the  RM13.2m  impairment  on  its  Tasmanian veneer plant would see 4Q core profits clock in at RM13.3m (-40.8% y-o-y, -55.8% q-o-q). Full  year  FY12  revenue  and  core  profit  were  lower  at  RM797.4m  (-13.9%  y-o-y)  and RM67.1m (-58.6% y-o-y) as the company's timber division plunged into losses due to poor plywood  prices  and  the  veneer  plant  impairment. The year's core  earnings  represent 96.8% and 99.6% of our and consensus forecasts.


Weak prices. ASPs for all of its major products fell in 4QFY12, with the prices for plywood (-16% y-o-y), FFB (-33% y-o-y), CPO (-28% y-o-y) and export logs (-14% y-o-y) all falling by double digits. Exports to Japan are the main drag for the timber division as the recovery in  Japanese construction  continues to be slow. Nonetheless, the Japanese government's recent determination to tackle deflation in the country through easier monetary policy and increased fiscal spending may lead to higher infrastructure spending, lifting timber demand as a result.

Palm  oil  to  drive  earnings.  FFB  production  grew  9.9%  y-o-y  in  FY12  despite  generally weak production for the industry. Ta Ann's trees are young and should experience double-digit organic production growth over the next few years, further increasing the division's importance to the group's total bottomline. Our expectations are for FY13 FFB production to  expand  by  23.1%  y-o-y,  before  further  increasing  by  15.9%  y-o-y  in  FY14  to  718,309 tonnes. Ta Ann's oil palm trees are on average five years old, with its oldest trees at just 12 years old. The company's planted area is now a sizable 33,824 ha, situated in the vicinity of Sibu, Sarawak.
 
Upgrade  to  NEUTRAL.  We  are  keeping  our  FY13  and  FY14  earnings  forecasts unchanged.  Our  FV  is  hence  maintained  at  RM3.40,  based  on  13.0x  FY13  plantation earnings and 9.0x FY13 timber profits. Following the share price's 9.5% decline since our previous SELL call, we are upgrading Ta Ann back to NEUTRAL.

Source: OSK