Period  4Q14/FY14

Actual vs. Expectations  FY14 core net profit* (CNP) of RM109m was within expectations, as it made up 104% of street’s full-year estimates and 99% of ours.

Dividends  None, as expected. For FY14, TAANN paid dividends of 20.0 sen which was close to our expected 21.9 sen.

Key Results Highlights  YoY, FY14 core earnings rose by 69% driven mainly by Timber division which PBT rose by 107%. Logs/plywoods enjoyed strong sales volumes growth of 19%/7% and higher ASPs by 9%/6% on the back of the drier season which allowed for more harvesting. Plantations saw higher CPO production (+59%) due to the new mill which commenced last year while FFB growth was decent (+7%). However, the effects were mostly negated by the new mill’s start-up costs and flattish CPO price of RM2,246/mt (-1%), resulting in Plantation division’s PBT only achieving growth of 6%.

 QoQ, 4Q14 PBT fell by 53% mainly due to lower sales volumes from: (i) Timber division which saw Logs/Plywood declining by 33%/3% even though ASPs were flat, (ii) Plantation division which saw FFB/CPO production volumes dropping by 16%/14% albeit flat ASPs.

Outlook  Management expects the demand for logs to continue its uptrend over 2015 driven by Japan and India while the market continues to be affected by Myanmar’s export log ban. Supply of logs should be boosted by the commencement of acacia harvesting. Although Plantation division is likely to see higher toplines due to the new mill, we reckon that segment earnings will remain unexciting as we anticipate weakening CPO prices in 2H15 while CPO production, which has far thinner margins than FFB sales, will start to be a more prominent contributor to the segment.

Change to Forecasts  Raising FY15E core earnings by 35% to RM110m (+1% YoY). We are raising our log ASP by 10% to USD270/m3 as 4Q14’s ASP was at USD262/m3 while we have assumed higher log volume sales of 5% YoY (flat previously). We maintain our assumptions for other divisions.

Rating Upgrade to OUTPERFORM (from MP)

Valuation  We raise our TP to RM4.44 (from RM3.70) based on a lower 15.0x Fwd PER (previously 16.9x) on higher FY15E core EPS of 29.7 sen. Our 15.0x Fwd PER is based on a lower -0.5SD to 3-year historical mean valuation (from mean valuation). As Timber was the main reason for our TP upgrade, we opt to conservatively apply a lower valuation basis to incorporate earnings risk arising from highly volatile timber earnings. Note that timber sales are very price sensitive, and EBIT margins have been historically volatile, ranging between -13% to 26% in the last 8 years.

Risks to Our Call  Lower-than-expected CPO prices. Lower-than-expected timber product prices. Higher-than-expected cost of production. 

Source: Kenanga