TAANN’s 9M16 CNP at RM94.1m was within consensus forecast (78%) and beat our estimate (93%) as Plantation rose on higher CPO price and production volume. An interim dividend of 5.0 sen was announced as expected, and we also expect management to maintain its pay-out ratio come year-end. Upgrade FY16-17E CNP by 40-17%. OUTPERFORM call is maintained, while TP increased to RM4.60 (from RM3.94) on earnings upgrade.

9M16 meets consensus. Ta Ann Holdings (TAANN)’s 9M16 Core Net Profit (CNP*) at RM94.1m was within consensus’ RM120.4m at 78% but above our RM101.0m forecast at 93%. This was largely on the back of CPO price improvement (+12% to RM2,388/metric ton (MT)) and better FFB production (+8% to 491.3k MT). A second interim dividend of 5.0 sen was announced, for adjusted year-to-date (YTD) dividend of 9.2 sen, which we deem in line as we expect management to maintain its historical pay-out ratio at c.50% come year end.

Stronger plantation. YoY, CNP declined 24% mainly on weaker Timber contribution (-54%) due to lower export log volume (-16%) and prices (-20%). However, this was partly offset by better Plantation PBT (+65%) on better prices and volumes as discussed above. QoQ, CNP jumped 89% as Plantation PBT soared 1.8x on a 30% FFB production jump. Timber earnings also improved 20% on better log prices (+14%) and plywood prices (+10%), as well as export log volume recovery (+16%).

Bright 4Q16 ahead. In the coming quarter, we expect TAANN to maintain or improve on 3Q16 results, as quarter-to-date (QTD) USD/MYR has strengthened 4% to 4.20 which bodes well for Timber segment margins. Meanwhile, we expect TAANN to see higher CPO prices as well, given the QTD increase of 14% to RM2,750/MT. While we understand TAANN has sold forward c.60% of its 4Q16 CPO production, we still expect QoQ CPO prices to be higher than 3Q16 and 4Q15.

Upgrade FY16-17E CNP by 40-17% to RM141-128m as we reduce our CPO cost per ton assumptions to reflect the better economies of scale due to production improvement. We also tweak our USD/MYR estimate up to 4.10 from 4.00 to reflect our latest house view.

Maintain OUTPERFORM with higher TP of RM4.60 (from RM3.94) based on unchanged Fwd. PER of 16.0x applied to higher FY17E EPS of 28.8 sen (from 24.6 sen) post-earnings upgrade. Our Fwd. PER of 16.0x is based on an unchanged +0.5SD valuation basis, which we believe is justified by TAANN’s above-average FY16E FFB growth of 12%, well above the sector average of +2%. The stronger USD should also benefit Timber earnings, while CPO prices remain supportive heading into the mid-term horizon.

Source: Kenanga Research - 17 Nov 2016