News

Ta Ann Holdings (TAANN)’s subsidiary Ta Ann Plantation Sdn. Bhd. has entered into two Joint Ventures with Pelita Holdings Sdn. Bhd. (Pelita) to develop two parcels of NCR land in Kanowit and Kapit, Sarawak of 17.0k hectares ("ha") and 11.2k ha, respectively. We gather that 16.9k ha or 60% of the total 28.2k ha is deemed plantable area.

TAANN will hold a 60% stake in the JV, while the remaining 40% will be held by Pelita (30% as a trustee of NCR owners and 10% directly owned by Pelita). TAANN also mentioned that the JVs are subject to approval of the federal and state governments and the board of Pelita.

Note that TAANN does not need to commit any capital or investment outlay at this stage. The capital outlay will be incurred on a staggered basis depending on the progress of participation by the project's participants. The expected eventual total capital for the JV is RM84.5m.

Comments

We are long-term positive on the JV which further expands TAANN's landbank by 29% to 126.2k ha. Note that we expect its Plantation division to contribute 82% of FY15E EBIT of RM156.8m.

Based on the eventual total capital of RM84.5m, we think that the valuation of the land at RM5,000/ha favours TAANN as it matches the valuation of their previous transaction with Pelita in Oct-12.

We also like the financing terms as the progressive payments will be met with ‘income streams’ via the progress participation as planted area matures. On this basis, assuming a planting rate of 2.0k ha a year at a cost of RM30k/ha, we expect additional planting cost of RM60m a year. At an 80-20 debt-equity ratio, we reckon net gearing could increase to 0.3x from 0.2x currently, which is fairly manageable given TAANN’s solid FY15- 16E free cash flow of RM92m-RM97m.

Outlook

With CPO prices currently trading around our expected FY15 forecast of RM2,200/MT, we expect upside to be mainly from its timber division, driven by robust demand in Japan and India. Furthermore, supply should remain tight due to Myanmar's ban on log exports.

Forecast

We maintain our FY15-16E CNPs at RM110m-RM111m as any earnings impact from the JVs would only kick in from FY18E since oil palm trees only begin producing FFB after three years.

Rating

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

Valuation

Maintain our TP of RM4.48 based on average FY15-16E EPS of 29.9 sen. Our TP is based on 15x Fwd. PER implying a -0.5SD valuation as we incorporate earnings risk from historically volatile timber earnings (with EBIT margin ranging between -13% and 26% in the last eight years). We also like TAANN for its attractive dividend yield of 5.2%, well above the sector 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 - 23 Jun 2015