Kenanga Research & Investment

Ta Ann Holdings - A Muted Quarter

Publish date: Thu, 25 May 2023, 10:07 AM

TAANN’s 1QFY23 results disappointed as plantation earnings weakened on lower FFB output while CPO price held flat QoQ, though was softer YoY. Timber earnings did better QoQ but also declined YoY as demand adjusted to rising interest rates. Softer earnings outlook is expected for TAANN, hence our downgrade of  FY23-24F net profit forecasts by 25% and 20%, respectively. TP is  also cut by 13% to RM3.40 (from RM3.90) but MARKET PERFORM call is maintained.

1QFY23 core net profit disappointed, coming in at only 21% and 20%  of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from  lower-than-expected CPO prices realised.

A weak 1QFY23. Plantation PBT fell to RM38.6m (-50% QoQ, -58%  YoY) as FFB output softened seasonally to 0.127m MT (-35% QoQ, - 4% YoY) while CPO price was flat QoQ at RM3,900 per MT but 30%  lower YoY due to record prices last year. Timber PBT surged QoQ from losses in 4QFY22 to RM16.9m but still 25% lower YoY as firmer log prices (US$280/m3 ; +22% QoQ, +7% YoY) helped cushioned lower plywood earnings as selling prices and sales volume eased QoQ and  YoY. 1QFY23 log production recovered 24% QoQ to 76K m3 (-9% YoY)  as the post-COVID re-opening of China prompted mills there to replenish inventory. 1QFY23 net cash of RM191m was lower than the  RM230m in Dec 2022 after paying RM49m of dividends in Jan 2023.

Muted full-year’s earnings likely. We cut our FY23-24F net profit  forecasts by 25% and 20%, respectively, on the back of the following:

(a) range-bound palm oil prices. We are trimming average CPO  prices forecasts from RM3,800 per MT to RM3,700 over FY23-24.  Global edible oil supply is improving along with demand, hence our  flattish but still firm CPO price outlook. Plantation margins may improve in the latter half of FY23 as costs, notably lower fertiliser cost starts taking effect but weaker FY23-24F earnings are still likely when compared to FY22.

(b) subdued timber prices. Rising interest rates and slower economic outlook are likely to dampen home building and construction activities.  Softwood prices have already corrected by nearly 20% QoQ and YoY  in 1QCY23. Operating under such environment, tropical timber prices  are expected to stay muted but steady in FY23 and FY24 as supply is  more restricted due to tight regulations and certification. Plywood margins have tightened from rising costs.

Annual 25.0 sen dividend is estimated. TAAN has no fix dividend  policy or schedule. In FY22, dividends were announced in Feb (5.0 sen), May (10.0 sen), Sept (15.0 sen) and Nov (10.0 sen) to reach 40  sen. Thus far, a 10.0 sen dividend has been declared, hence annual  NDP forecast of 25.0 sen is maintained.

Maintain MARKET PERFORM on lower TP of RM3.40 (from RM3.90) as we roll forward our valuation base year to FY24F (from FY23F). A  30% discount to an integrated 15x PER minus a 5% discount for the group’s lower ESG rating are still applied. Its logging operations are certified by Malaysian Timber Certification Scheme and internationally by PEFC while the palm oil operations adhere to MSPO standards.  TAAN offers defensive net-cash balance sheet with reasonable dividends yields but softer commodity prices are expected to cap earnings upside.

Risks to our call include: (i) weather impact on edible oil and timber supplies, (ii) unfavourable commodity price fluctuations,  and (iii) cost inflation.

Source: Kenanga Research - 25 May 2023

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