Period     1Q13

Actual vs. Expectations  The 1Q13 core net profit of RM3.9m was below expectations as it made up only 5% of the consensus FY13 full-year forecast (RM87m) and 6% of ours (RM63m). We believe this could be caused by a higher than expected labour cost as we had underestimated the impact of the minimum wage policy implementation on Ta Ann.

Dividends    As expected, no dividend was announced.

Key Results Highlights     YoY, the 1Q13 core net profit declined 66% to RM3.9m as CPO prices weakened 30% to RM2,200/mt and plywood prices dropped 12% to US$496/m3. In addition, a higher operating cost  (due to the implementation of the minimum wage policy) further weakened Ta Ann’s earnings.

QoQ, the 1Q13 core net profit slipped 58% to RM3.9m as CPO prices worsened by 6% to RM2,200/mt and FFB volume fell 32% to 103k mt.

Outlook    The 2H13 outlook should be better as the FFB production is usually higher. Note that in FY12, 62% of the Group’s FFB was produced in the 2H of the year. 

Change to Forecasts     We have reduced our FY13 earnings by 9% to RM57m after assuming a higher labour cost. However, we have maintained our FY14E earnings of RM103m as we think Ta Ann’s higher FFB volume should neutralise the increase in the labour cost.

Rating  Maintain MARKET PERFORM

Valuation     We will be monitoring its future 2Q13 results closely for any further cost issues and may look to downgrade our call/TP then if the issue persists. 

For now, we are maintaining our TP of RM3.55 based on an unchanged Fwd. PER of 12.8x on CY14E EPS of 27.7 sen.

Risks    Worse than expected CPO prices.

Worse than expected timber products prices.

Higher than expected cost surge.

Source: Kenanga