TAANN’s 1HFY23 results met our expectations but disappointed market. Its 1HFY23 core net profit plunged 62% YoY due largely to lower CPO prices. While timber earnings will remain subdued in 2HFY23, plantation earnings should improve on easier costs. We fine-tune up our FY23-24F net profit by 5% and 1%, respectively, but keep our TP of RM3.40 and MARKET PERFORM call.

Its 1HFY23 core net profit came in within our expectations at 51% of our full-year forecast but disappointed the market at only 40% of the full-year consensus estimate.

YoY, its 1HFY23 core net profit fell 62% as its average CPO price realised declined by 38% YoY coupled with weaker FFB output, offset by higher CPO output as TAANN bought more third-party FFB crop to mill, and lower overall CPO production cost. 1HFY23 log production also fell, mostly during 2QFY23.

QoQ, its 2QFY23 core net profit fell 16% on weak timber contribution. CPO prices also eased QoQ and more so YoY given the strong CPO prices a year back but 2QFY23 FFB output recovered 12% QoQ, helping to lift the quarter’s plantation PBT to RM49.7m (+29% QoQ, - 66% YoY). However, 2QFY23 timber PBT fell sharply QoQ and YoY to RM8.3m despite better revenue as lower logs and plywood prices eroded margins. The QoQ improvement in timber revenue was underpinned largely by higher volume of plywood exports.

Its net cash rose to RM223m from RM191m a quarter ago. After declaring a 10.0 sen dividend in 1QFY23, no dividend was declared in 2QFY23, thus 1HFY23 dividend amounted to only 10.0 sen compared to 15.0 sen in 1HFY22.

Subdued earnings likely, nonetheless, we are nudging up FY23-24F CNP slightly by 5% and 1%, respectively, on the back of the following:

1. Firm palm oil prices expected. We are raising our forecast average CPO prices a little, from RM3,700 per MT back to RM3,800 for FY23-24 as global edible oil inventory levels stay tight with weather uncertainties ahead. As such, CPO prices should stay firm with 2HFY23 plantation margins likely to improve from lower input costs (notably fertiliser) as well as seasonally better FFB production.

2. Dull timber demand likely. Home building and construction activities are expected to ease amidst rising interest rates and slower economic outlook. As such, both softwood and hardwood log prices have fallen by nearly half YoY in the first half of this year. Facing such operating environment, muted timber prices are likely for the rest of FY23 and into FY24, helped mainly by tight regulation on supply.

Still expecting 25.0 sen dividend. TAAN has no 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). So far a 10.0 sen dividend has been declared for FY23, maintain full year 25.0 sen NDPS for FY23-24.

Maintain MARKET PERFORM and TP of RM3.40 based on a 30% discount to an integrated plantation player of 15x PER minus a 5% ESG rating discount. TAANN’s palm oil operation is not RSPO certified but adhere to MSPO standards while its logging operations are certified by Malaysian Timber Certification Scheme and internationally by PEFC.

The group’s net cash balance sheet offers defensiveness and decent dividends yields are expected. However, no catalyst is in sight as earnings are capped by dull commodity prices.

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 - 1 Sept 2023