Period

1Q15

Actual vs. Expectations

1Q15 core net profit* (CNP) of RM26m was in line, at 24% of both consensus and our full-year estimates of RM110m.

Dividends

Interim dividend of 10.0 sen declared, as expected.

Key Results Highlights

YoY, 1Q15 CNP slipped 10% mainly on weaker CPO prices (-12% to RM2,208/MT). However, CPO volume rose 27% to 27.8k MT due to its new mill which commenced last year, while FFB growth was flattish (-3% to 110.6k MT). The Timber division improved 20% despite lower export volume (-18% to 47k cubic meters (m3)) as prices improved 5% to USD264/m3.

QoQ, 1Q15 CNP improved 9% as Timber division’s PBT almost doubled to RM33m on stronger export log prices (+2%) and higher export volume (+14%). However, Plantation segment’s PBT dropped 94% to RM1m on 27% FFB volume decline and lower CPO volume by 37% resulting in poorer mill operating efficiency as well.

Outlook

Management expects the demand for logs to continue its uptrend over 2015 driven by Japan and India while supply continues to be tight due to Myanmar’s log export ban. Supply of logs should be boosted by the commencement of acacia harvesting.

We are overall neutral on Plantation as we expect CPO prices to trade range-bound around our FY15 forecast of RM2,200/MT or -8% YoY. However, this could be partially offset by TAANN’s above-average FY15E FFB growth prospects of 10% (against sector average of 5%).

Change to Forecasts

No change to our FY15-16E earnings estimates.

Rating

Maintain OUTPERFORM We think the regional timber supply crunch should provide near-term earnings upside, while the downside on Plantations is limited as FFB production should improve seasonally from 2Q15 onwards.

Valuation

We raise our TP slightly to RM4.48 (from RM4.44) as we partly roll forward our base year to average FY15-16E EPS of 29.9 sen (previously 29.7 sen). No change to our 15x Fwd. PER which implies a -0.5SD valuation which incorporates earnings risk from potentially 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. At current prices, dividend yields are relatively attractive at 5.3% compared to other planters’ average of 2.3%.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected timber product prices.

Higher-than-expected cost of production.

Source: Kenanga Research - 28 May 2015