TAANN’s 1HFY24 results were disappointing. After a poor 1Q, 2QFY24 earnings continued to slip QoQ and YoY as better earnings from plantation segment were offset by losses from the timber division. Operations in the former should continue to fare well moving into 2H but the latter will likely to still face headwinds. We downgrade FY24-25 core EPS by 14% and 11%, respectively, and TP to RM3.60 (from RM4.00). MARKET PERFORM call is kept.

1HFY24 core net profit came below forecasts. Excluding fair value gain of RM28m), 1HFY24 core net profit of RM63.6m accounted for just 35% and 33% of our and consensus full-year forecasts, respectively.Higher CPO price, FFB harvest and lower cost led to better YoY plantation earnings but weak timber market led to losses from the unit.

Better 2Q plantation offset by timber losses. 2QFY24 plantation earnings improved on firmer CPO price of about RM4,000 per MT (+3% QoQ, +8% YoY) and higher FFB output of 0.149m MT (+17% QoQ, +4% YoY). However, the group’s timber operations slid into RM5.8m pre-tax loss in 2Q compared to RM4.5m profit in 1Q (RM8.3m profit in 2Q of last year) as weaker demand led to lower sales volume and prices for both logs and plywood.

Full-year FY24 earnings to dip below a year ago. Plantation profits should improve but not for timber which may continue reporting losses for another quarter or two. Firm CPO prices of around RM3,800 per MT is expected for FY24-25 on global edible oil supply shortfall, albeit modest but likely enough to be supportive of edible oil prices, including palm oil, to stay firm. Meanwhile cost is likely to stay moderate as fuel and fertiliser costs have dipped by 10%-30% YoY while improving PK prices could potentially cushion a pending minimum wage hike.However, improving plantation contribution is expected to be negated to an extent by weak timber performance.

Timber demand to stay dull. Economic uncertainty and higher borrowing costs are expected to continue to dampen new construction and home building activities. Hence, timber demand and prices are expected to stay muted over 2HFY24 and into FY25 as well. A firmer MYR may further put off very price sensitive buyers. TAANN exports logs mainly to India which is growing but 1H mix of log type was less favourable while plywood exports to Japan was soft.

Forecasts. We are cutting FY24-25 core net profit slightly, by 14% and 11% respectively to reflect weaker timber segment performance.

Valuations. Our TP is also downgraded by 10%, from RM4.00 to RM3.60 based on 1.0x PBV, the average for smaller plantation companies’ PBV range of 0.9x-1.1x, with a 10% risk premium discount to account for possible widening in timber losses as well as a 5% ESG discount for its 2-star rating as appraised by us (see Page 3). TAANN’s plantations are MSPO certified but not RSPO while its timber unit is under Malaysian Timber Certification Scheme and European-based PEFC. Maintain MARKET PERFORM.

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

Source: Kenanga Research - 27 Aug 2024