News    Ta Ann announced that its 88% owned subsidiary, Ta Ann Tasmania (“TAT”) plywood mill project has been included as a funded project with AUD7.5m (or RM22.3m) in grant money. We gather that the grant money will be provided by the Tasmanian Government as part of its AUD100m Economic Diversifications Projects. 

In our view, the grant is likely to be used for the upgrade of TAT’s current veneer mill into plywood mill. Currently, TAT’s veneer mill produces wood veneer (a midstream product) which will be sent to Ta Ann’s plywood mill in Sarawak to be processed further into plywood (final downstream product). When the upgrade is completed in about a year time, we believe all processing (up to plywood product) will be done in TAT. Hence, there should be some transport and logistic cost savings.

Comments    We are positive on the deal due to the potential cost savings from lower transportation and logistic cost. However, we reckon the savings will not be very significant at this juncture.

Outlook   Despite the positive impact, Ta Ann’s short-to-midterm earnings are still influenced by low CPO prices. Hence, we expect FY13E core earnings to weaken 11% YoY to RM57.0m in line with an expected decline in CPO prices YoY.

Forecast   Maintain FY13E-FY14E core earnings of RM57mRM103m pending further guidance from management.

Rating  Maintain UNDERPERFORM

Current share price is reflecting valuation of 26.7x Fwd. PE which we think is very high as compared to the plantation sector average of 21.0x and Ta Ann’s own 5-year average of 16.3x. While we believe that the outlook for its timber segment has improved, we wish to highlight that the major earnings driver is still its plantation segment where CPO prices have tumbled 28% YoY to ~RM2300 in 1H13. Hence, the next earnings result may again disappoint.

Valuation    Maintain our TP of RM3.55 based on unchanged Fwd.

PE of 12.8x on CY14E EPS of 27.7 sen.

Risks   Better than expected CPO prices.

Better than expected timber products price.

Source: Kenanga