1HFY20 CNP of RM23.8m (+89% YoY) is deemed within our (24%) but above consensus’ (34%) estimates. Historically, 2HFY accounted for 80% of full-year earnings. We see upside (42-23%) to consensus’ FY20-21E CNP in the coming months. 3QFY20 earnings are expected to improve significantly on: (i) higher CPO prices (QTD3QFY20: +18% QoQ), (ii) expectation of higher FFB output, and (iii) recovery in export log volume. Keep FY20-21E CNP unchanged. Upgrade to OUTPERFORM with a higher TP of RM3.15 (from RM2.90) on higher FY21E PER of 13x reflecting mean. At current share price, TAANN is traded at FY21E PER of only 11.7x (at c.50% discount to peers). Even at PBV level, TAANN is traded at FY21E PBV of 0.80x (c.19% discount to peers’ average).

1HFY20 deemed within expectation. 2QFY20 Core Net Profit (CNP) came in at RM10.7m, bringing 1HFY20 CNP to RM23.8m (+89% YoY). Despite accounting for 24% of our full-year estimate, the result is within our expectation as we expect 2HFY20 earnings to improve significantly HoH backed by our expectations of: (i) seasonally higher FFB output, and (ii) improvement in export log volumes (post lockdowns). However, against consensus, the result is above expectation at 34%. As illustration, historically, 2HFY accounted for 80% (2-year average) of full-year earnings. 1HFY20 FFB output is also within expectation at 39% (2-year average: 42%). The absence of dividend was as expected.

2QFY20 dragged by lower export log volume. YoY,1HFY20 CNP rose (+89%), mainly driven by plantation segment on the back of higher CPO prices (+27%) and higher CPO production (+16%). This resulted in significant plantation PBT improvement (+303%) alongside plantation PBT margin expansion (+7.6ppt), overshadowing the decline (-98%) in timber PBT. QoQ, 2QFY20 CNP fell (- 18%) mainly due to timber sinking into LBT of RM7.4m (vs. PBT of RM7.7m in 1QFY20) due to a 46% plunge in export log volume from lockdowns in major export markets. This was cushioned by a 115% improvement in plantation PBT as higher FFB/CPO production (+26%/+21%) outstripped lower CPO prices (-12%).

3QFY20 earnings to show strength. We are positive on the group’s outlook. As highlighted in our previous report (1-Jun-2020), investors should look beyond 2QFY20 results which saw timber plunging into losses from slower demand (virus-led). 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 (post lockdowns). We expect 3QFY20 earnings to improve significantly premised on: (i) higher CPO price (QTD3QFY20: +18% QoQ), (ii) expectation of higher FFB output (entering into peak production season), and (iii) recovery in export log volume (post lockdowns).

No changes to earnings estimate as results are within expectations. We highlight here the potential 42-23% upside to consensus’ FY20-21E CNP and earnings upgrades from the street in the coming months.

Major earnings improvement ahead; Upgrade to OUTPERFORM with a higher TP of RM3.15 (from RM2.90) based on a higher FY21E PER of 13x, reflecting mean valuation (from 12x; -0.5SD previously). Our higher valuation is justified by: (i) expected major earnings improvement in 2HFY20E (+216% HoH), (ii) high odds of consensus earnings upgrade in the coming months, (iii) and subsiding risks from its timber division post lockdowns in major countries (turnaround expected in 3QFY20). At current share price, TAANN is traded at FY21E PER of only 11.7x (at c.50% discount to peers). Even at PBV level, TAANN is traded at FY21E PBV of 0.80x (c.19% discount to peers’average).

Risks to our call include: (i) change in export log quota, (ii) significant deterioration of export log prices, and (iii) re-imposition of lockdowns.

Source: Kenanga Research - 1 Sept 2020