Ta Ann Holdings Berhad (TAANN)’s FY17 CNP of RM125.7m meets consensus at 98% but slightly short of our estimate at 94% on poorer-than-expected timber performance. No dividend was announced, bringing full-year DPS to 10.0 sen, below our 15.0 sen estimate. No change to FY18E CNP as we introduce FY19E CNP of RM128.5m. Maintain MARKET PERFORM with higher TP of RM3.70 (from RM3.60).

FY17 meets consensus. FY17 CNP came in at RM127.5m, meeting consensus’ forecast at 98% of RM128.2m, but slightly below our forecast at 94% of RM133.7m due to the underperforming Timber sector which recorded only RM1.7m PBT for the year. FFB production at 745k metric tons (MT) was well in line at 100% of our 743k MT forecast. No dividend was announced, bringing full-year DPS to 10.0 sen, missing our expected 15.0 sen. This implies a pay-out ratio of 35% and dividend yield of 2.8%.

Plantation replaces Timber. YoY, CNP softened 2% as growth in Plantation PBT (+86%) was offset by a drop in Timber contribution (- 98%). Plantation was boosted by both price (+11%) and production (+12%) increases, but Timber volumes halved (-54%) as the Sarawak government cut its export quota volumes and tightened logging standards. Plywood volumes also weakened 23% in tandem. Log (+25%) and plywood (+7%) price increases could not offset the sharp declines in volume. QoQ, CNP improved 10% largely on lower tax expense (-71%) as PBT was weaker (-33%) on off-season Plantation PBT (-22%) and wider Timber losses (+80% to RM9.5m LBT). Wet weather led to both lower FFB (-11%) and log (-59%) harvesting, which could not be offset by flat CPO prices and better log prices (-14%).

Strong palm focus. Although management expects timber prices to continue appreciating, we do not anticipate a strong recovery for the sector as volumes will remain suppressed due to tight controls. Plantation should continue to be the growth segment taking into account TAANN’s planned acquisition of Sarawak Plantations, although we expect the deal to be earnings neutral in the medium term. For its own plantation assets, we expect moderate FFB production growth of 13-12% in FY18-19, slightly higher than the sector average of 8%.

Adjust up FY18E CNP by 3% to RM127m as we introduce FY19E CNP of RM128m. We tweak our FY18E CNP slightly higher to account for its Sarawak Plantation land purchase and minor forex assumptions. We also introduce our FY19E CNP implying only 1% YoY earnings growth as plantation improvements are offset by weak Timber volumes.

Maintain MARKET PERFORM with higher TP of RM3.70 (from RM3.60) as we roll forward our valuation base year to average of FY18-19E, for higher applied EPS of 28.7 sen (from 27.8 sen) and maintain our Fwd. PER of 13.0x based on an unchanged mean valuation basis. We believe this is fair, as we expect Plantation improvements going forward to be offset by a poor Timber outlook due to weak volumes and potentially softer USD/MYR rates. Thus, we maintain our MARKET PERFORM call on the stock.

Risks to our call include: (i) lower-than-expected CPO prices, (ii) further limits on log exports, (iii) weaker-than-expected FFB performance.

Source: Kenanga Research - 01 Mar 2018