Ta Ann Holdings (TAANN)?s FY16 CNP at RM122m missed expectations at 91% of consensus RM136m and 82% of our RM151m forecast. No dividend was announced, with full-year DPS of 10.0 sen missing our 16.0 sen estimate. Cut FY17E CNP to RM114m (-18%) while we introduce FY18E CNP of RM127m. We downgrade our call to MARKET PERFORM (from OUTPERFORM) with lower TP of RM4.10 post-earnings adjustment.

FY16 misses expectations. FY16 Core Net Profit (CNP*) missed consensus RM136m and our RM151m estimates at 91% and 82%, respectively. Timber segment disappointed as log and plywood prices fell 12% while log exports declined 22%. FFB production at 666.4k metric tons (MT) was in line at 95% of our forecast. No dividend was announced, bringing full-year DPS to 10.0 sen, missing our 16.0 sen forecast. Implied pay-out ratio is 36%, missing the 5- year average of 60%.

Better Plantation, weaker Timber. YoY, CNP dropped 45% as Timber PBT more than halved (-56%) on lower volume and prices. This was partly offset by Plantation PBT (+38%) thanks to better FFB volume (+6%) and higher CPO prices (+12%). QoQ, CNP fell 44% as Timber earnings weakened 47% due to a substantial drop in log exports (-42%) coupled with flat prices. Plantation fell 43% as CPO prices were flat (+3%) but FFB volume weakened 16%.

Timber drawbacks. We continue to be positive on TAANN?s plantation operations with FY17-18E FFB growth of 11-13% exceeding the sector average of 8-10%. However, we think Timber volumes will continue to be soft, with tighter licensing requirements and certification processes. With higher chance of slow Timber performance, we turn more neutral on TAANN?s overall outlook.

Cut FY17E CNP by 18% as we introduce FY18E CNP. We reduce our FY17E CNP by 18% to RM114m as we lower our Timber price and volume assumptions. We also introduce our FY18E CNP of RM127m implying earnings growth of 12% mainly due to better FFB production.

Downgrade to MARKET PERFORM with lower TP of RM4.10. We lower our TP to RM4.10 (from RM5.00) post earnings adjustment, while Fwd. PER is maintained at 16.0x, applied to lower EPS of 25.7 sen (from 31.3 sen). 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 FY17-18E FFB growth of 11-13%, well above the sector average of +8-10%. However, with soft Timber performance likely to persist, we downgrade our call to MARKET PERFORM (from OUTPERFORM).

Source: Kenanga Research - 01 Mar 2017