Taking a closer look at TAANN, we believe it is overly discounted in view of: (i) expanding palm oil area, (ii) stable timber earnings relative to Sarawak peers with upside log prices and favourable demand, and (iii) bargain valuation. After adjusting our FY18-19E CNP up by 3-6%, we reaffirm our OUTPERFORM call with unchanged TP of RM3.70 after tweaking our valuation to Sum-of-Parts, based on Plantation PER of 12.5x and Timber PBV of 0.6x.

Palm maturity pipeline is key differentiator. Pre-SPB acquisition, our estimate indicates that TAANN’s immature and young palm estate (4-6 years) of c.26% is lower than the sector average of c.37%. Post-SPB buy-out, TAANN’s planted area will be enlarged by c.23% to c.57,272 hectares (ha) based on a 30.4% acquisition stake. This would increase its immature/young palm estates to c.43% of the planted area which is well above the sector average of c.37%. With management guiding c.2,400ha of new planting under the new NCR projects in FY18, we are encouraged by the group’s expansion of young palm area as we anticipate consistent FFB output growth moving into higher yielding age bracket. We expect 2-year FFB CAGR growth of 23% (vs. small cap planters’ range -12%-22%) to be supported by new area and improving FY18-19E FFB yield of 18-18MT/ha from 17.4MT/ha in FY17A. Post- SPB, our model indicates palm oil earnings contribution to the group will be slightly higher at 98.4%-96.3% (vs.98.1%-95.8%, pre–SPB) for FY18-19 respectively.

Upside to log prices offsets weakening USD. TAANN’s share price has been declining, to YTD low of RM3.06 (-17%), (lower than average of timber peers’ decline of -14%). We believe this is due to the weakening of USD/MYR since the beginning of the year. We envisage TAANN as one of Sarawak key beneficiaries, to enjoy premium prices riding on the sudden spur of Japanese plywood demand and shortages of log production in the market. Furthermore, Japanese buyers are willing to pay premium prices for available quality logs, particularly Meranti. Market price for Sarawak Meranti is >65,000 Yen/m3 (USD594/m3) or a 122% premium over average log prices of USD268/m3 for the past 12 months. We expect TAANN’s timber segment to see a reversal with FY18-19E EBIT of RM2.9-7.1m vs. FY17A loss of RM10.3m, driven by higher seasonal productivity and improved exports logs’ ASP of +7.0%-7.0% respectively. (please refer overleaf for details).

Cheap plantation proxy. TAANN is currently trading at bargain valuations at 10.4x Fwd. PER against the small cap planters average 17.3x. EV/planted ha is also undemanding at RM32.2k against its small peers average c.RM57.9k. We think the market discount is unjustified, considering its above-average dividend yield of 2.9% (vs. small cap average of 2.6%), steady 21.0% OER and 4.9% KER (a tad higher than smallish peers’ average OER of 20.4% KER of 4.5%).

Raise FY18-19E CNP to RM130.9-135.7 by 3-6% as we adjust our FY18-19E FFB growth assumptions to 20-2% (from 11-13%) post SPB acquisition. We also revise upward our exports logs and plywood ASP by +7%-7% and 15%-8% (from 8%-8% and -14%-3%) for FY18-19 reflecting improved price prospects.

Reiterate OUTPERFORM with an unchanged TP of RM3.70 as we introduce a Sum-of-Parts valuation to better reflect individual business segmentation. For the Plantation segment, we apply a Fwd. PER of 12.5x, in line with TAANN’s historical mean 3-year PER, which we note implies a deep (unjustified) discount to the small cap average of 17.3x. Meanwhile, we impute a Fwd. PBV of 0.6x on timber division, in line with the average PBV of its closest public listed peers (JTIASA, WTK and SUBUR) for timber division. (please refer overleaf for details).

Risk to our call include: (i) lower-than-expected CPO prices, (ii) further limit on logs export, (iii) weaker-than-expected FFB performance.

Source: Kenanga Research - 17 May 2018