1QFY21 CNP of RM28.5m is above our (33%), but within consensus (24%), expectation, mainly due to timber division’s turnaround. We expect earnings to improve in 2QFY21 as stronger CPO prices and production recovery boost plantation segment. Meanwhile, timber division’s profitability hinges largely on India’s export logs demand. Raise FY21-22E CNP by 19-15%. Maintain MP with higher SoP-derived TP of RM3.05 (from RM3.00). Trading at FY21E PER of 12.4x (vs. peers’ 16-18x), we think the markdown is warranted by: (i) its timber division discount, and (ii) poor ESG score of 42%.

Above expectations. 1QFY21 Core Net Profit (CNL) came in at RM28.5m (+117% YoY) which is above our (33%), but within consensus’ (24%), expectation, due to better timber performance. We deem 1QFY21 FFB output of 137k MT (flat YoY) at 18% of our full-year estimate as inline, anticipating production recovery in subsequent quarters. Absence of dividend is as expected.

Results’ highlight. YoY, 1QFY21 CNP leapt (+117%) mainly due to stronger CPO price (+45%) which overwhelmed lower export logs/plywood volume (- 22%/-9%). QoQ, 1QFY21 turnaround (vs. CNL of RM1.4m in 4QFY20) mostly attributable to timber division’s turnaround due to: (i) higher plywood prices (+11%), and (ii) higher export log volume (+23%). This made up for the 24% decline in plantation segmental PBT as lower FFB/CPO output (-20%/-22%) drowned the impact of higher average CPO price (+21%).

Upstream strength expected in 2QFY21. The group’s plantation division should see sequential improvement in 2QFY21 from a double-barrelled boost – higher CPO price (QTD 2QFY21: +13%) and production recovery. While we think its timber division’s profitability could continue, India’s (its largest buyer of export logs – 82% in FY20) COVID-19 situation has to be watched closely. Return of strict lockdowns and surge in freight rates could hamper the outlook.

Raise FY21-22E CNP by 19-15% on higher timber margin of c.6% (from 1-2%).

Maintain MARKET PERFORM with a higher SoP-derived TP of RM3.05 (from RM3.00). TAANN is currently traded at FY21E PER of 12.4x, implying -0.5SD from mean, which we think offers limited upside considering its peers (without timber volatility) are traded below -0.5SD levels. TAANN also has the lowest ESG score among our coverage at 42%.

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 - 27 May 2021