Period

3Q15/9M15

Actual vs. Expectations

Ta Ann Holdings (TAANN) recorded stellar 9M15 core net profit* (CNP) of RM125m which exceeded both consensus (RM114m) and our (RM110m) full-year forecasts by 9% and 13%, respectively.

Dividends

A second interim dividend of 10.0 sen was declared, firming YTD DPS to 20.0 sen, making up 100% of our previous FY15E DPS.

As we increase our FY15-16E earnings, we also increase FY15E DPS by 20% to 24.0 sen implying a payout ratio of 54% (in line with the 3-year average of 53%). Our updated FY15E DPS implies a 5.9% dividend yield.

Key Results Highlights

YoY, 9M15 CNP jumped 46% to RM125m as Timber segment’s PBT rose (+42% to RM126m) on higher USD/MYR exchange rate (+17% to 3.78) and log prices (+10% to USD279/cubic meter (m3)) which offset lower sales volume (logs: -21% to 134k m3; plywood: -8% to 140k m3). Meanwhile, Plantation PBT weakened 10% to RM47m as lower CPO prices (-8% to RM2,125/metric ton (MT)) superseded higher FFB volume (+10% to 453k MT).

QoQ, 3Q15 CNP doubled to RM66m as Plantation segment’s PBT jumped 1.9x to RM34m on higher FFB volume (+29% to 193k MT). Timber segment’s contribution also rose (+73% to RM59m) on higher USD/MYR exchange rate (+11% to 4.05) and Plywood volume (+9% to 49k m3) which offset lower log volume (-6% to 42k m3).

Outlook

Short-term Timber earnings should be supported by robust demand and favourable exchange rates (4Q15 QTD: 4.28 vs. 3Q15’s 4.05).

We are neutral on short-term Plantation’s prospects heading into a seasonally lower production season. However, this should be offset by higher quarter-to-date CPO prices of RM2,187/MT (+6% vs. 3Q15). Long-term Plantation’s outlook is positive as we expect higher CPO prices at RM2,400/MT in FY16.

Change to Forecasts

We increase our FY15-16E CNP to RM164-141m (49- 11%) as we raise our FY15-16E USD/MYR exchange rate forecast to 4.00 from 3.68-3.83.

Rating

Maintain OUTPERFORM We think the regional timber supply crunch should provide nearterm earnings upside. Meanwhile, the downside on plantation is limited as we expect CPO prices to improve in FY16.

Valuation

We increase our TP to RM5.70 (from RM4.80) as we roll forward our valuation base year to FY16E (from average FY15-16E) and apply an unchanged Fwd. PER of 15.0x on higher EPS of 38.0 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 5.9%, well above the sector average of 2.6%.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected timber product prices.

Higher-than-expected cost of production.

Source: Kenanga Research - 17 Nov 2015