Earnings to play catch up in subsequent quarters

Ta Ann’s 1Q16 core net profit of MYR12m (-54% YoY, -74% QoQ) was below expectation due to higher-than-expected cost of production at both the timber and plantation divisions. We adjust our cost estimates and reduce our 2016-18 EPS by 14-21%. We expect earnings to play catch up in the following quarters on stronger FFB output in 2H. Maintain BUY with a lower MYR5.00 TP (-28%).

1Q16 net profit was below estimates

1Q16 core net profit of MYR12.5m (-54% YoY, -74% QoQ) accounted for 7%/8% of our/consensus full-year estimates. The earnings shortfall could be due to higher cost of production at: i) the timber division due to the adoption of revised logging operation in preparation for forest certification and ii) plantation on the back of higher manuring activities which typically occur in 1H.

But revenue was within expectation

Meanwhile, 1Q16 group revenue (-2% YoY, -19% QoQ) was in line, accounting for 21% of our full-year forecasts. The stronger plantation revenue growth (+28% YoY) driven by higher FFB production (+11% YoY, - 30% QoQ) and CPO ASP (+3% YoY, +6% QoQ) was offset by the weaker timber revenue (-18% YoY). This was because logs export volumes were 33% lower YoY (-5% QoQ) and logs export ASP in MYR also dropped 6% YoY (-10% QoQ). While plywood sales volumes also dropped 13% YoY (-6% QoQ), its blended plywood ASP in MYR was flattish YoY (+11% QoQ).

Adjusting earnings forecasts. Maintain BUY

As logs export price outlook remains weak on lackluster demand and 1Q16 production cost was high, we reduce our 2016 timber ASP estimate and increase our timber and plantation production cost estimates. Subsequently, we cut our 2016/17/18 EPS estimates by 27%/12%/12% after. Our new TP is MYR5.00 (-28%) based on unchanged 15x 2016 PER, pegged at 4-yr historical mean.

Source: Maybank Research - 20 May 2016