Ta Ann Holdings Bhd (TAANN)’s 1H18 *CNP of RM20.2m came below both consensus at 25% and our forecast at 20% on weaker-than expected ASPs of CPO and timber sales volume. No dividend was announced, as expected. We slash FY18-19E earnings by 13%-13% to RM88.6-90.6m as we tone down FFB and CPO sales volumes to account for the slow-pick up in 1H18. Downgrade to MARKET PERFROM with lower TP of RM2.50 (from RM2.85) based on unchanged Fwd. PER of 12.3x.

1H18 missed expectations. 1H18 CNP of RM20.2m came below consensus expectation at 25% and our forecast at 20%. The lower- than-expected CNP was due to weaker ASPs of CPO and FFB by (- 18%) and (-15%) respectively. FFB production at 306k metric tons (MT) made up 38% of our 796k MT full-year assumption. No dividend was announced, as expected.

Weaker Plantation; while timber still in the red. YoY, 1H18 CNP plunged (-72%) as Plantation PBT slumped (-70%), on lower ASPs of CPO (-18%) at RM2,325/MT FFB (-15%) that led to margins erosion. Meanwhile, Timber division remains in the red with LBT of RM4.2m as the surge in ASPs of exported logs (+40%) to USD365/m3 and plywood (+22%) to USD537/m3 failed to offset the sharp decline in sales volume as result of government export quota limits and tightened logging standards. (log:-61% to 13.6k MT; plywood: -25% to 58.9k MT). QoQ, 2Q18 CNP jumped more than 2-fold, (+191%) to RM15.0m largely on improved PBT contribution from plantation (+107%) and timber division (PBT RM3.0m from LBT RM7.2m previously). This was on the backed of higher ASPs of logs (+2%) to USD367/m3 and plywood (+6%) to USD553/m3 with increased in FFB sales volume (+21%).

Outlook. Plantation should continue to be the growth driver as we expect meaningful contribution entering into peak season in 2H18 to be driven by higher production on better FFB and CPO sales volumes. We envisage the timber division to further recover underpinned by appreciating timber prices and better sales volume as a result of increase in log exports proportion. We gather from management that TAANN has recently been awarded certification of which 40% of the 149,756 ha certified concession areas are allowed to be exported. We reckon timber performance to gradually improve in view of the recent certification award, affording it a pricing premium leading to better profitability.

Slashed down FY18-FY19E CNP by 13%-13% to RM88.6m-90.6m as we trimmed our FFB and CPO sales volumes by 3%-3% and 14%- 14%, respectively, given the slow pickup to-date till 1H18.

Downgrade to MARKET PERFORM on the back of a lower TP of RM2.50 (from OP, RM2.85) based on unchanged Fwd. PER of 12.3x applied to average of FY18-19E EPS of 20.1 sen (from 23.2 sen). Our TP of RM2.50 implies a Fwd. PER of 12.4x in line with the 3-year average. We believe this is fair, as we expect better plantation and timber performance entering into the peak crop season in 2H18 while 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. However, with further easing in CPO prices and limited logs export quota potentially affecting group earnings further and valuations; we will be monitoring these closely.

Downside 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 - 30 Aug 2018