9MFY19 CNP of RM37.1m came in above our, but within consensus, expectations at 90%/65%, due to FFB growth (+4% YoY) vs. an expected decline (-9% YoY) from minimal impact of dry weather and peak crop season. No dividend was declared, as expected. 4QFY19 should see sequential earning improvement on higher CPO prices (+12%). Increase FY19-20E CNP by 55-12% to RM64-86m on higher FY19-20E FFB growth (7-4%). Reiterate OUTPERFORM with a higher TP of RM3.20.

9MFY19 results above expectations. TAANN’s 3QFY19 Core Net Profit (CNP*) came in at RM24.4m (-23% YoY; 411% QoQ), bringing 9MFY19 CNP to RM37.1m, which is above our estimate at 90%, and within consensus’ estimate at 65% (historically, for 9MFY profits for the past 3 years, 9M accounted for an average 60% of full-year earnings). The surprise came from FFB growth (+4% YoY) vs. an expected decline (-9% YoY) on the back of peak crop season and minimal impact from the dry weather. No dividend was declared, as expected.

Plantation dazzles with QoQ improvement. QoQ, 3QFY19 CNP surged (+411%, from a low base) to RM24.4m boosted by: (i) 45%/38% increase in FFB/CPO volumes respectively, and (ii) higher average CPO prices (+6%), causing Plantation PBT margin to expand (+18ppt).

YoY, despite 4% growth in FFB output, 9MFY19 CNP declined (-29%) to RM37.1m attributed to: (i) lower average CPO prices (-14%), and (ii) lower average prices for export logs (-32%) due to unfavourable product mix (higher composition of lower quality logs).

Count on plantation to deliver sequential improvement. We expect to see sequential earnings improvement in 4QFY19 from plantation premised on higher CPO prices (QTD4QFY19: +12% QoQ). Meanwhile, we gathered that the second phase of TAANN’s Forest Management Unit (FMU) certification (Raplex and Pasin) over a total forest land of 196.2k ha is on-going, and is expected to be completed by 1H20.

Increase FY19-20E CNP by 55-12% to RM64-86m as we increase our conservative FY19/20E FFB growth to 7%/4%, respectively (vs. -9%/- 1% previously) to account for minimal dry weather impact on production.

Reiterate OUTPERFORM with a higher Target Price of RM3.20 (from RM2.85) based on CY20E PER of 16.4x, reflecting -0.5SD, in line with smaller planters under our coverage’s range of (-1.0SD 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 - 21 Nov 2019