Ta Ann Holdings (TAANN)’s 1Q16 Core Net Profit** (CNP) at RM14.3m missed our and market expectations at 11% and 9%, respectively, on Timber price reversal and weaker volumes. Dividend of 5.0 sen is beneath previous year’s 10.0 sen. FY16E/FY17E earnings cut by 26%/22% as we lower price and volume forecasts, but we maintain MARKET PERFORM despite lower cum/ex-TP RM4.35/RM3.63 (from cum/ex-TP: RM5.88/RM4.90) on above-average FFB growth prospect.

1Q16 missed forecasts, making up 11% of our CNP forecast (RM124.5m) and 9% of consensus (RM165.0m). This was mainly due to lower log (-16% year-on-year (YoY) to USD221/cubic meter (m3)) and plywood prices (-8% to USD469/m3), compounded by weaker production volume (logs: -33% to 31.3k m3; plywood: -14% to 39.2k m3). A dividend of 5.0 sen was announced, which we deem below our expectation as the previous two years’ 1Q dividend was 10.0 sen.

Timber segment fell. Timber segment PBT dropped 71% YoY and 58% quarter-on-quarter (QoQ), on lower logs volume (-33% YoY; -5% QoQ) and a sharp reversal in log prices (-16% YoY, -6% QoQ to USD469/m3). This was partly offset by a 7.3x YoY jump in Plantation segment’s PBT to RM8.0m on CPO price improvement (+8% to RM2,383/metric ton (MT)) and FFB volume improvement (+12% to 124.2k MT). However, Plantation’s QoQ performance was 81% weaker, in line with the production cycle, as better CPO prices (+11%) failed to offset lower FFB volume (-29%).

Worst is over? Management mentioned that they anticipated higher log production “with the improving weather condition in the second quarter”, while Japanese demand should improve on Olympics construction activities. However, we expect domestic volume to be lower than previous years due to tighter logging oversight. Meanwhile, we anticipate stronger Plantation segment’s performance in 2Q16 as CPO prices have remained stable above RM2,500/MT since mid-March, while FFB production should continue rising in line with cropping patterns.

FY16E/FY17E CNP reduced 26%/22% to RM92m/RM109m as we lower Timber production volumes and log price expectations by 6%/10%. We also tweak our FFB growth forecast to 12%/8% (from 15%/7%) to account for last year’s drought impact.

Maintain MARKET PERFORM with lower cum/ex-TP of RM4.35 /RM3.63 from RM5.88/RM4.90 as we: (i) account for lower FY16E/FY17E EPS, (ii) roll forward our valuation base year to 1H17E for Fwd. EPS of 27.2 sen (from 33.6 sen), and (iii) update our Fwd. PER to 16.0x (from 17.5x) on an unchanged valuation basis of +0.5SD. We believe our valuation basis is justified by TAANN’s above-average FFB growth of 12% against the sector average of 6%. However, we keep our MARKET PERFORM call as we think stabilising timber demand and better Plantation outlook is offset by lower expected timber volume. 

Source: Kenanga Research - 20 May 2016