Ta Ann Holdings Berhad (TAANN)’s 1H17 Core Net Profit (CNP*) of RM73.0m exceeded consensus and our forecasts at 59% and 64%, respectively, on higher-than-expected CPO prices. A second interim dividend of 5.0 sen was announced for YTD DPS of 10.0 sen, a positive surprise from the traditional 3Q historical norms. This makes up 86% of our 11.6 sen full-year forecast. Upgrade FY17-18E CNPs by 10- 1%. Maintain MARKET PERFORM with higher TP of RM3.65 (from RM3.60).

1H17 beats expectations. The 1H17 CNP at RM73.0m exceeded expectations, at 59% of consensus RM124.8m and 64% of our RM114.1m forecast on higher-than-expected CPO prices of RM2,830 vs. our full-year forecasted RM2,550/MT. FFB production at 742.5k metric tons (MT) was within expectations at 45%. A second interim dividend of 5.0 sen was announced, a positive surprise as dividends are traditionally declared in 1Q and 3Q. This implies YTD pay-out ratio of 61% and makes up 86% of our full-year forecasted 11.6 sen DPS.

Plantation jumps. YoY, CNP improved 74% on the back of 2.8x higher Plantation PBT thanks to both higher CPO prices (+19%) and FFB production (+19%). This was offset by weaker Timber contribution (- 47%) as higher log prices (+18%) failed to make up for lower volume of export logs (-48%) and plywood (-9%) due to tightening logging regulations. QoQ, CNP weakened 16% largely on higher tax expense (+19%) as PBT was flat at RM57.8m. Better Plantation contribution (+24%) on higher FFB volume (+18%) despite softer CPO prices (-7%) was offset by borderline profitable Timber performance (-78%) due to further weakening volume of export logs (-28%) and plywood (-31%), although prices strengthened for both logs (+12%) and plywood (+4%).

Plantation to solve timber woes? Looking ahead, we expect Plantation to contribute the bulk of 2H17 earnings as production heads into peak season. Furthermore, we expect TAANN to see slightly better-than-average CPO selling prices thanks to some forward selling of c.15% of 2H17 production. However, Timber contribution will likely remain weaker as tighter regulations and lower export quota to 20% (from 30%) leads to margin compression for local logs. The plywood business should see slight improvement with gradually strengthening prices, though production could remain tight. Management noted their plans to increase production of certified timber to partly compensate for tighter harvesting regulations.

Upgrade FY17-18E CNPs by 10-1% to RM126-129m as we up our FY17E applied CPO price by 2% to reflect forward sales. We also up our FY17E DPS by 29% to 15.0 sen based on higher pay-out ratio of 53% (from 45%), closer to the 3-year historical average of 50%. This is also in line with management practice of dividend pay-out in multiples of 5.0 sen.

Maintain MARKET PERFORM with higher TP of RM3.65 (from RM3.60) post-earnings upgrade. We up our applied EPS to 29.0 sen (from 27.2 sen) as we roll forward our base year to FY18E (from average FY17-18E) while updating our Fwd. PER to 12.6x (from 13.2x) based on an unchanged mean valuation basis. We believe this is fair, as we expect stronger full-year Plantation performance to be offset by poor timber contributions due to higher premium and lower volumes. Hence, we maintain our MARKET PERFORM call on the stock.

Source: Kenanga Research - 23 Aug 2017