Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit* (CNP) of RM59m exceeded consensus full-year (RM103m) at 57%, but was within our forecast (RM110m) at 54%. This was likely due to higher log and plywood prices on the back of tightening supply.

Dividends

No dividend declared, as expected.

Key Results Highlights

YoY, 1H15 CNP growth was flat at +1% as higher Timber segment’s PBT (+25% to RM67m) due to better log prices (+7% to USD549/cubic meter (m3)) was offset by lower Plantation segment’s PBT (-49% to RM13m) on lower CPO prices (-14% to RM2,155/metric ton (MT)).

QoQ, 2Q15 CNP rose 25% to RM33m as Plantation segment’s PBT jumped 11x to RM12m as FFB volume rose 35% to 149k MT. Meanwhile, Timber segment’s division PBT rose marginally (+2% to RM34m) as log price improvement (+8% to USD285/m3) was offset by lower volume (-4% to 45k m3).

Outlook

We agree with management’s assessment of “confident of a satisfactory performance for the coming year” heading towards a peak CPO production season in 3Q15, as well as robust timber demand and favourable exchange rates.

Change to Forecasts

No change to our FY15-16E forecasts.

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 RM4.80 based on average FY15-16E EPS of 32.0 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 6.1%, well above the sector average of 2.4%.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected timber product prices.

Higher-than-expected cost of production.

Source: Kenanga Research - 1 Sep 2015