Ta Ann reported a decent 1QFY22 Core Net Profit (CNP) of RM75m which came within (+1%) our expectation but 13% below consensus’. Prices for both palm oil and logs were good but production was mixed. The quarter FFB output was weaker while log production improved. Looking ahead, CPO prices should ease on seasonally higher production but staying well supported. On the other hand, logs as well as plywood prices are expected to remain firm after Russia banned log exports in Jan 2022. We are adjusting up our FY22-23 CNP by +1% and +2% after imputing firmer CPO and timber prices but tighter margins. A 10 sen dividend was also declared which brings the cumulative FY22 dividends to 15 sen (versus our estimated 30 sen for the full year). Maintain our MARKET PERFORM rating and TP of RM6.00.

Within our expectation but below market’s. Underpinning 1QFY22 CNP were stronger commodity prices, better timber production but mixed FFB harvest. Plantation earnings eased to RM92.4m (-48% QoQ, +115% YoY) on estimated CPO price of RM5,500/MT (+11% QoQ, +50% YoY) which more than offset poorer FFB output of 0.132m MT (-35% QoQ, -3% YoY).

1QFY22 timber earnings fared much better, albeit from a low base, at RM22.3m (+119% QoQ, +403% YoY). Demand for logs was good with production at 83,442m3 (+40% QoQ, +257% YoY) as Russia which is a major global log producer and exporter banned log exports from January 2022. Log supplies to mills in importing countries such as Japan were thus disrupted and Japan is a key plywood market for Ta Ann. As such the Group’s plywood operations enjoyed stronger prices as well as output. Ta Ann also exports raw logs but more to India which enjoyed steady prices and volume.

More dividends. In Feb 2022, the Group announced a 5.0 sen interim dividend for 1QFY22. The Group has announced other 10.0 sen dividend which is payable on 24 June (ex date: 7 June). This means the cumulative FY22 dividends to date is 15.0 sen.

Outlook. Seasonal pick-up in palm and soyabean productions in 2H of CY22 should provide much needed relief to a tight edible oils market but will also add pressure for palm oil prices to trend lower. However, CPO price downside should be limited due to: (a) a tight international edible oils and fats market which is likely to see improvements only in CY23, (b) China’s demand is expected to grow as its economy gradually normalizes, and (c) current high energy prices are supportive of vegetable oil prices as biofuel demand will rise if vegetable oil prices fall sufficiently. CPO prices for Ta Ann should average RM4,500/MT for FY22 (up from RM4,200/MT previously) and RM4,000/MT for FY23 compared to our old estimate of RM3,500/MT but we are raising cost as well.

The demand for timber is also firming up thanks to the ongoing economies reopening with resumption of construction and infrastructure works. At the same time, log supply has also tightened following Russia’s exports ban of logs. Subsequently, US, EU and Japan have imposed trade sanctions on Russia due to the Ukraine conflict which started in late February. For Ta Ann, Japanese demand for its plywood should improve further along with demand for logs.

Although we are optimistic of the timber market, bulk of the Group’s earnings is derived from palm oil. As such we are maintaining our MARKET PERFORM rating and TP of RM6.00 which is based on 10x FY22 CEPS of 60.2 sen. Our TP of RM6.00 also translates to a 5% dividend yields for FY22 which we maintain at 30.0 sen. To date, Ta Ann has already declared 15.0 sen of dividends.

Source: Kenanga Research - 24 May 2022