Ta Ann Holdings Berhad (TAANN)?s 1Q18 CNP of RM5.2m fell short at 4% of both consensus and our forecast due to lower volume in both timber and plantation segments. Dividend of 5.0 sen was announced, as expected. We slash FY18-19E CNP by 22-23% to RM102-104m accounting for lower FFB growth and timber volume. We also tweak our plywood and logs volume to account for the setbacks. Maintain OUTPERFORM with lower TP of RM3.05.

1Q18 missed forecasts. 1Q18 CNP fell far below expectations, making up only 4% of consensus? RM123.6m and our RM130.9m CNP forecast, respectively. The lower-than-expected CNP was due to weaker sales volume in both palm oil and timber segment due to the wet weather in Sarawak. An interim dividend of 5.0 sen was announced, implying YTD pay-out ratio of 49% and in line with our full- year forecasted 9.0 sen DPS at 56%.

Sharp decline in plantation and timber. YoY, CNP plunged 87% as Plantation PBT dropped 78%, weighed down by both CPO (-13%) and FFB sales volume (-11%) due to wet weather in Sarawak that led to higher production cost. This was further dampened by weakened CPO prices at RM2,383/MT (-19%). The lacklustre performance of timber division continued as the segment saw losses of RM7.2m (from PBT of RM13.5m) on lower volume (log:-71% to 5.8k MT; plywood: -33% to 31.4k MT), despite higher ASP of logs (45%) to USD361/m3 and plywood (21%) to USD524/m3. QoQ, CNP fell 81% largely on lower FFB (-28%) and CPO (-28%) volume affected by wet weather. CPO price also dropped by 11%. Notably, higher ASP of logs (7%) and plywood (6%) could not offset the decline in volume but timber LBT (- 24%) narrowed to RM7.2m from RM9.5m.

Plantation remains key earnings driver. We gather from management that the lower-than expected 1Q18 earnings performance was due to the wet weather condition in Sarawak. Going forward, we expect improvement in both palm oil and timber division as April and May volume has picked up according to management. We envisage log prices to hold up well due to suppressed logs supply in the market as a result of tight state control. Plantation should continue to be the growth driver as we expect bulk of contribution in 2H18 earnings to be driven by higher production entering peak season. Although we envisage timber prices to continue appreciating, we expect slow recovery for the sector given low volumes.

Slashed down FY18-FY19E CNP by 22%-23% to RM102m-RM104m as we trimmed our FFB growth forecast to 5.4%-2.5% from 20%-2% respectively given the slow pickup to-date. We also tweak our plywood and logs volume to account for the setbacks in1Q18, which was due to unfavourable weather.

Maintain OUTPERFORM with lower TP of RM3.05 (from RM3.70) based on unchanged Fwd. PER of 12.5x applied to lower FY18-19E EPS of 22.9 sen (from 29.4 sen) for plantation division. Our Fwd. PER of 12.5x is based on an unchanged mean valuation basis. Meanwhile, we maintain 0.6x PBV on timber division, in line with the average PBV of its closest public listed peers (JTIASA, WTK and SUBUR). We still like TAANN for its relatively better earnings stability compared to other Sarawak timber players as well as its expanding palm oil business which will offset its timber division losses.

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

Source: Kenanga Research - 25 May 2018