Period  3Q14/9M14

Actual vs. Expectations Ta Ann (TAANN)’s 9M14 core net profit* (CNP) of RM85m is above expectations as it makes up 87% of consensus full-year FY14 forecast of RM98m and 89% of our estimate of RM96m.

 We believe that the variance resulted from the timber division which enjoyed better-than-expected “Export Log” prices at USD254/m3 (against our expectation of USD250/m3 previously.

Dividends  10.0 sen dividend was announced, raising YTD dividend to 20.0 sen. Although this is a positive surprise, we believe that this is related to the oneoff RM17.0m sum that it received as compensation from the Australian Government.

 Recall in Jun-2013, TAANN had agreed to lower its peeler wood supply entitlement held under contracts with Forestry Tasmania. In return, the Australian Government agreed to a conditional compensation with this RM17.0m as the second and final tranche of payment.

 Hence, we believe that the high dividend payout should be one-off and maintain our FY15E dividend at 10.8 sen. Our FY14E dividend has been increased to 20.0 sen after assuming higher dividend payout of 75%.

Key Results Highlights YoY, 9M14 CNP surged 116% to RM85m as timber division PBT jumped 78% to RM88m. Note that timber division benefited from better ASP of export logs at USD254/m3 (+7% YoY) as well as higher volume (+30% YoY to 168,647 m3). We gather that the higher volume of export logs is caused by drier season this year, which allowed more harvesting. Plantation division PBT increased by 25% to RM52m as CPO prices improved 3% to RM2301/MT with FFB volume +8% to 411,658 MT.

 QoQ, 3Q14 CNP declined 10% to RM27m due to lower core PBT from timber division which we estimated has declined 32% to RM18m. We have excluded the one-off RM17m compensation from Australia in our core PBT in 3Q14. The earnings decline was cushioned by better core PBT in plantation division (+101% to RM27m) as FFB volume seasonally increased by 52% to 179,436 MT, which was more than enough to cover lower CPO prices (-17% to RM2089/MT). Note that Sarawak FFB production pattern is slightly different as it peaks in 3Q (against 4Q norm seen in Peninsular Malaysia).

Outlook  Management expects that the demand for logs to be firm in 4Q14 as market continues to be affected by Myanmar’s export log ban. However, for plantation division, 3Q14 is already the peak production period. Hence, we think that plantation division earnings should decline QoQ as CPO price is still around RM2,200/MT currently.

Change to Forecasts  FY14E CNP is increased by 5% to RM101m as we have increased our export log ASP assumption to USD255/m3. Our FY15E earning is UNDER REVIEW at this juncture pending our new CPO prices estimate. Our last estimate for FY15E CPO prices is RM2,500/MT and we are likely to reduce it.

Rating Maintain MARKET PERFORM

Due to TAANN’s good earnings recovery prospect in its timber division, we are likely to keep the recommendation on this stock as MARKET PERFORM. We are likely to trim our CPO prices for FY15E, but we should also increase our estimate for export logs resulting in only slight TP decline for TAANN. We are also looking to review our valuation metrics as well.

Valuation  Our TP is UNDER REVIEW as our FY15E EPS is UNDER REVIEW.

 Our last TP of RM4.55 is based on valuation of 16.9x Fwd. PE to FY15 EPS of 26.9 sen.

Risks to Our Call  Lower-than-expected CPO prices.

 Lower-than-expected timber product prices.

 Higher-than-expected cost of production.

Source: Kenanga