1QFY20 CNP of RM13.1m (+67% YoY) is below our (11%) and consensus’ (12%) expectations due to lower FFB output (-4% YoY). Despite lowering FY20/21E earnings (-14%/-13%), we are positive on the group’s outlook. Reiterate OUTPERFORM with a higher TP of RM2.90 based on rolled over FY21E PER of 12x (-1.0SD). Current share price implies FY21 PER of 9.8x (at >50% discount to peers) and FY21 PBV of 0.67x (16% discount). We find it hard to comprehend why the street is pricing TAANN similar to one of its peers which has been loss making for 2 years (Fwd. PBV of 0.6x).

1QFY20 below expectations. 1QFY20 Core Net Profit (CNP) came in at RM13.1m (+67% YoY/-59% QoQ), which is below both our/consensus’ estimates at 11%/12%. The negative deviation stemmed from lower-then expected 1QFY20 FFB output of 137k MT (-4% YoY/-24% QoQ), which accounted for 17% of our full-year estimate. The absence of dividend was as expected.

Results’ highlight. YoY, 1QFY20 CNP rose (+67%), mainly driven by plantation segment as higher CPO price (+34%) outstripped lower FFB output (-4%). This resulted in significant plantation PBT improvement (+2.1x) alongside plantation PBT margin expansion (+3.7ppt). For its timber division, higher export logs/plywood sales volume (+94%/+25%) helped to cushion decline in export logs/plywood ASPs (-23%/-14%). QoQ, despite higher CPO price (+10%), 1QFY20 CNP plunged (-59%) on lower FFB output (-24%). Timber division saved the quarter on higher export logs volume/ASP (+35%/+8%), resulting in timber PBT of RM7.7m (vs. LBT of RM12.9m in 4QFY19).

Optimistic FY20 FFB target. The group has a FY20 FFB target of 835k MT, implying growth of 12% YoY. Having said that, with 4MFY20 FFB output down (-4% YoY), we remain conservative in our forecast with FY20 FFB output at 801k MT (+7% YoY), post revision. Despite our slightly conservative FFB forecast, we are positive on the group’s overall outlook. With the Forest Management Unit (FMU) certification for Pasin completed, the group’s total certified forest land now stands at c.346k ha, pointing to an inevitable surge in log production volumes. We reckon investors should look beyond 2QFY20 results, which should see compression in profit margin from its timber division from slower demand (virus-led).

Reduce FY20-21E CNP by 14-13% on: (i) lower CY20-21 CPO price forecast of RM2,300-2,400/MT (from RM2,550/MT), and trimmed FY20-21E FFB output by 2% each, implying 7-5% growth.

Undemanding valuation; Reiterate OUTPERFORM with a higher TP of RM2.90 (from RM2.65) based on rolled over FY21E PER of 12x (-1.0SD). At current share price, TAANN is traded at FY21E PER of only 9.8x (at >50% discount to peers). Even at PBV level, TAANN is traded at FY21E PBV of 0.67x (c.16% discount to peers’ average). We find it hard to understand why the street is pricing TAANN similar to one of its peers which has been loss making for 2 years (Fwd. PBV of 0.6x) especially when TAANN is one of the more profitable upstream planters, having recorded decent profits (vs. losses by its peers) during depressed CPO price environment. Our TP implies FY21E PBV of 0.81x which is more reasonable.

Risks to our call include: (i) change in export log quota, (ii) further deterioration of export log prices, and (iii) failure to implement biodiesel mandates which may drive CPO prices lower.

Source: Kenanga Research - 1 Jun 2020