1Q19 CNP of RM7.9m came in below our/consensus’ expectations at 11%/8%, which we believe was due to lower- than-expected plywood volume, lower-than-expected average CPO price and higher-than-expected effective tax rate. No dividend was announced, which was a slight negative surprise. Trim FY19-20E CNP by 10-14% on lower plywood sales volume and higher effective tax rate. Maintain OUTPERFORM with a lower TP of RM2.40.

1Q19 below expectations. TAANN’s 1Q19 Core Net Profit (CNP*) came in at RM7.9m (+53% YoY; -74% QoQ), which is below both our/consensus’ full-year forecast at 11%/8%. We believe the negative deviation came from: (i) lower-than-expected plywood volume, (ii) lower-than-expected average CPO price (RM1,931/MT vs. our FY19 forecast of RM2,000/MT), and (iii) higher-than-expected effective tax rate of 40%. FFB production of 143k MT made up 18% of our full-year projection of 793k MT, which we deemed as broadly within as production is usually the weakest in the first quarter. As guidance, 1Q18 FFB output accounted for 19% of full-year output. No dividend was declared during the quarter which was a slight negative surprise as TAANN usually declares dividend during 1Q and 3Q.

Dragged by plantation. YoY, CNP improved (+53%) to RM7.9m from a low base (RM5.2m) as timber division registered PBT of RM8.2m (vs. LBT of RM7.2m) lifted by significant improvement in export logs volume to 15.5k m3 (+167%). The improvement was partly offset by weaker plantation PBT of RM4.2m (-57%), no thanks to: (i) lower average CPO price of RM1,931/MT (-19%), despite a 4% improvement in FFB output, and (ii) lower plywood volume (-42%) which we gathered was due to port congestion in Japan. QoQ, 1Q19 CNP fell to RM7.9m (-74%) due to seasonally lower FFB output (-27%), which was partially cushioned by 6% improvement in CPO price to RM1,931/MT.

FFB production to pick up. Moving forward, we expect to see improvement in plantation contributions driven by higher FFB production despite a softer CPO price outlook. Meanwhile, TAANN has obtained its new Forest Management Unit (FMU) certification, allowing it to export 40% (previously 20%) of logs harvested under this 149,756 ha certified concession area. In addition, two more FMU certifications over a total forest land of 196,187 ha is expected to be completed, the first by 1H19 and the second by 2H19.

Trim FY19-20E CNP by 10-14% to RM64-86m as we reduced FY19/20E plywood sales volume to 99k/108k m3 (-26%/-21%) given Japan’s port congestion impact, adjusted effective tax rate to 30% (from 26%) and slightly toned down FY20E plywood margin assumptions. Post earnings revision, we also lowered FY19E NDPS to 8.0 sen, while keeping our FY20E NDPS of 10.0 sen.

Maintain OUTPERFORM with a lower Target Price of RM2.40 (from RM2.75) based on an unchanged Fwd. PER of 12.3x CY20E EPS of 19.3 sen. Our Fwd. PER of 12.3x is based on -1.0SD in line with planters under our coverage’s range of (-2.0SD to 0.5SD). Note that among our smaller planters, TAANN is one of the more profitable ones even under a depressed CPO price outlook.

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

Source: Kenanga Research - 29 May 2019