TAANN’s 9M18 CNP came in at RM52m, meeting consensus’ expectation at 76% and in line with 61% of our forecast as we expect the group to maintain its improved 3Q18 performance. A second interim dividend of 5.0 sen was announced beating our full-year 5.5 sen estimate. Maintain FY18-19E CNP at RM84- 86m. Upgrade to OUTPERFORM with unchanged TP of RM2.35 on unchanged FY19E Fwd. PER of 12.3x.

Above consensus’ estimate but within ours. TAANN’s 9M18 CNP came in at RM52m, at 76% of consensus’ expectation (RM69m) and 61% of our forecast of RM84m. We believe this set of results is above street’s expectations but in line with our expectation as we expect the group to maintain its improved 3Q18 performance on the back of increased FFB and CPO sale volumes while also buoyed by appreciating ASP and better volume of export logs and plywood. FFB production at 532k MT made up 69% of our 774k MT full-year assumption. A second interim dividend of 5.0 sen was announced, bringing YTD DPS to 10.0 sen, beating our full-year 5.5 sen estimate.

Timber back to black. YoY, 9M18 CNP dropped (-47%) as Plantation PBT plunged (-55%), on lower ASP of CPO (-19%) at RM2,235/MT and FFB (-21%) that led to margins erosion, Timber division returned to the black with PBT of RM5.4m lifted by the surge in ASP of exported logs (+26%) to USD345/m3 and plywood (+23%) to USD547/m3 offsetting the sharp decline in sales volume as a result of government export quota limits and tightened logging standards. (log: -76% to 25.8k MT; plywood: -19% to 89.9k MT). QoQ, 3Q18 CNP jumped more than 2- fold, (+111%) to RM31.7m largely on improved PBT contribution from plantation (+100%) and timber division (+222%). This was on the back of higher volume of logs exported (+57%) and plywood (+12%) with increased sales volume of FFB (+38%) and CPO (+27%).

Outlook. We continue to expect stronger plantation contribution in 2H18 driven by higher production on better FFB and CPO sale volumes despite softer CPO price outlook which remains a challenge. We envisage the timber division to improve profit-wise, spearheaded by appreciating timber prices and better sales volume as a result of increase in log exports proportion. TAANN has completed the first phase of its on-going timber certification programme, of which 40% of the 149,756 ha certified concession areas are allowed for exports. In addition, two more FMUs certification over a total forestland of 196,187 ha will be completed by 2019. We expect timber performance to gradually improve going forward, in view of the recent certification award, affording it a pricing premium leading to better profitability.

Maintain FY18-19E CNP at RM84-86m as we expect the group to maintain its improved 3Q18 performance on the back of better sales volume from both plantation and timber segments. We raise our FY18- 19E DPS to 10.0 sen each from 5.5-6.0 sen respectively in line with 2- year historical DPS of 10.0 sen.

Upgrade to OUTPERFORM with unchanged TP of RM2.35 following recent price weakness, based on unchanged Fwd. PER of 12.3x as we roll forward our valuation base to FY19E EPS of 19.3 sen. Our TP of RM2.35 implies a Fwd. PER of 12.3x, in line with the 3-year average (vs. other planters which are mostly pegged at -0.5 to -2.0 SD). We believe this is fair, as we expect better plantation and timber performance entering into the peak crop season in 2H18. We like TAANN for its relatively better earnings stability compared to other Sarawak timber players with further timber improvement expected.

Source: Kenanga Research - 26 Nov 2018