TAANN’s FY22 results came within expectations. 4QFY22 plantations and timber earnings were weaker on poorer CPO and log prices. FFB output as well as log and plywood exports also declined for the quarter, in part due to seasonal factor, but timber demand was probably weak as well. We are trimming FY23F net profit by 19% and lowering our TP to RM3.90 as well as downgrading our call from OUTPERFORM to MARKET PERFORM.

Weak 4QFY22. Plantation PBT fell to an estimated RM78m (-44% QoQ, -51% YoY) on seasonally weaker FFB harvest of 0.197m MT while average CPO price also dipped to RM3,900 per MT (-13% QoQ, - 25% YoY). Timber earnings were weakened as exports for logs and plywood declined along with their prices coupled with asset impairment charges against the group’s Australian-based plywood operations. Thanks to a strong first 9-month, FY22 earnings managed to end stronger YoY on better plantation and timber outputs as well as higher CPO and timber prices YoY. Net cash edged down QoQ, from RM285m in Sept 2022 to RM230m after paying its third interim dividends of RM66m in Oct 2022.

Softer earnings ahead. We are toning down FY23F core EPS by 19% to 41.7 sen and introducing FY24F EPS of 38.9 sen on the back of the following outlook:

a) Weaker palm oil prices. FY23-24F CPO prices are expected to soften to RM3,800-3,500 per MT respectively as global supply of edible oil is improving. However, prices should stay firm, supported by recovering global demand after having stagnated since 2020. However, margins are expected to stay subdued on cost inflation even as FFB production grows from 3-5% expansion in planted area. All in all, weaker plantation earnings are likely over FY23-24.

b) Declining timber prices. Tighter log supply lifted log and plywood prices for much of FY22 following Russia’s self-imposed ban on log exports effective Jan 2022 (i.e. before the Russia-Ukraine conflict). However, economic slowdown and rising interest rates are likely to dampen the construction and housing sectors over the next two years which in turn are likely to crimp demand for timber. Logging costs have also crept up, thus margins are expected to tighten somewhat.

Lower dividends ahead. A first interim dividend of 5.0 sen was announced in Feb 2022 followed by a second interim of 10.0 sen in May and a third interim of 15.0 sen in Sept. In Nov, a fourth interim dividend of 10 sen was announced. Disappointingly, no final dividend was declared, so total FY22 dividend was to 40.0 sen (vs. 30.0 sen for FY21). For FY23-24, we are expecting dividends of 25.0 sen a year.

Downgrading from OUTPERFORM to MARKET PERFORM on lower TP of RM3.90 (from RM5.10) based on 30% discount to integrated 15x PER against FY23F CEPS minus a 5% discount for the group’s low ESG rating. Nevertheless, its logging operations meet Malaysian Timber Certification Scheme and PEFC, an international timber certification body while the palm oil operations meet MSPO standards, and bio-capture to cut GHG emission is on the way. TAAN should see FFB growth with net cash and attractive dividends yields but weak palm oil and timber prices against sticky costs look set to curb margins.

Risks to our call include: (i) weather impact on palm edible oil and log supply, (ii) unfavourable commodity prices fluctuations, and (iii) cost inflation.

Source: Kenanga Research - 27 Feb 2023