Ta Ann Holdings Berhad (TAANN) recorded 1Q17 Core Net Profit (CNP*) of RM39.7m, which we deem within expectations at 31% of consensus and 35% of our forecast, as we expect a weaker 2H on higher logging premium and softer CPO prices. Dividend of 5.0 sen was announced, as expected. Maintain our FY17-18E CNP. Reiterate MARKET PERFORM with lower TP of RM3.60 (from RM4.10), implying mean valuation (from +0.5SD).

Broadly within expectations. TAANN’s 1Q17 CNP of RM39.7m came in at 31% of consensus’ RM130.0m forecast and 35% of our RM114.1m forecast. We deem this broadly within expectations as we expect a weaker 2H17 on the back of increased hill logging premium and a softer CPO price outlook. An interim dividend of 5.0 sen was announced, in line with our 11.6 sen estimate as we expect a similar payout in 4Q17.

Plantation segment soars. YoY, CNP jumped 1.8x as Plantation contribution soared 4.5x to RM44.2m on both higher CPO prices (+23%) and FFB volume (+25%). Timber segment earnings also improved, surging 42% to RM13.5m as plywood volume improved (+19%), offsetting softer plywood prices (-8%). Meanwhile, logs saw the reverse, with better prices (+13%) but lower production volume (- 35%). QoQ, CNP improved 35% on Plantation segment PBT growth (+53%) driven by stronger CPO prices (+18%) which offset seasonally weaker FFB volume (-11%). Timber contribution was slightly weaker (-2%) on both lower volumes and prices.

Softer 2H17 on the horizon? News sources recently reported that from Jul-1, the Sarawak state government plans to increase the hill timber premium, a tax chargeable on logs harvested from hill forests/hill species logs, to RM50 per cubic meter (m3) from only 80 sen/m3 previously. We estimate that the premium could lead to higher tax charge of c.RM4-8m in FY17-18E, though management noted that it may pass on the tax increase to customers. Meanwhile, with management noting lower log production in 2H17, we expect timber segment contribution to remain weak over the mid-term. Meanwhile, Plantation outlook is neutral as TAANN’s good full-year production growth outlook (+11% vs. sector’s +8%) is set against bearish CPO prices in 2H17.

Maintain FY17-18E CNP at RM114-127m as we deem the results broadly within expectations.

MARKET PERFORM call unchanged, with lower TP of RM3.60

(from RM4.10). We lower our TP to RM3.60 as we lower our valuation basis to mean level from +0.5SD, while also rolling forward our valuation base year to average FY17-18E for higher EPS of 27.2 sen (from 25.7 sen). With a lower valuation basis, our applied Fwd. PER is reduced to 13.2x (from 16.0x). We believe mean valuation is fair, as stronger full-year Plantation performance is offset by poor timber outlook due to higher premium and lower volumes. Hence, we maintain our MARKET PERFORM call on the stock.

Source: Kenanga Research - 24 May 2017