TAANN’s 1H16 CNP at RM42m was within our forecast (46%) but below market expectation (35%), possibly as market has yet to price in timber segment weakness. No dividend as expected. No change our earnings estimate and OUTPERFORM call. We upgrade our TP to RM3.94 as we roll forward our valuation base year to FY17E.

1H16 meets our expectations. Ta Ann Holdings (TAANN) 1H16 Core Net Profit (CNP) came in at RM42m, which was within our RM92m forecast at 46% but below consensus’ RM121m forecast at 35%. We believe this is because consensus has yet to price in Timber segment weakness due to weaker log prices (-20% YoYYtd) and volume (-27% YoY-Ytd). No dividend was announced, as expected.

Stronger plantation results. YoY-Ytd, CNP weakened 29% as Timber PBT halved on weaker log prices (-20% to USD220/cubic meter (m3)) and log volumes declined (27% to 66.7k m3) due to tighter harvesting restrictions and softer overseas demand. However, this was partly alleviated as Plantation PBT doubled to RM26m on higher CPO prices (+10%) and FFB volume (+9%). QoQ, CNP rose 93% as Timber PBT jumped 130% on seasonal volume improvement in logs (+13%) and plywood (+20%). Plantation earnings also increased 126% thanks to 29% higher FFB volume.

Bright 2H16 outlook. On the Timber side, 2H16 earnings should strengthen, because with the recently announced lower export quotas for logs, management expects timber prices to improve while demand should stabilise. Meanwhile, on the Plantation side, we are optimistic on near-term prospects as FFB production should see its seasonal peak in 3Q16. CPO prices are also supportive as quarter-to-date prices averaged RM2,500/MT or +5% compared to TAANN’s 1H16 average price of RM2,371/MT.

Maintain FY16-17E CNP at RM92-109m as 1H16 results are within our expectations.

Reiterate OUTPERFORM with higher TP of RM3.94 (from RM3.63) as we roll forward our valuation base year to FY17E (from average FY16-17E) for higher Fwd. EPS of 24.6 sen (from 22.7 sen). Our Fwd. PER of valuation is maintained at 16.0x on an unchanged +0.5SD valuation basis. We believe our valuation basis is justified by TAANN’s above-average FY16E FFB growth of 12% against the sector average of +2%. We maintain our OUTPERFORM call as we expect continued earnings improvement on the back of seasonally stronger FFB production and stabilising timber prices in 2H16.

Source: Kenanga Research - 30 Aug 2016