INVESTMENT HIGHLIGHTS

• FY16 earnings lower than expected

• Timber division is affected by low plywood and export log prices

• Plantation division PBT improved yoy

• Lacklustre outlook for FY17

• Downgrade to NEUTRAL with adjusted TP of RM4.25

FY16 earnings lower than expected. Ta Ann Holdings (Ta Ann) FY16 core net income (CNI) of RM112.2m was below expectation as it made up only 92% and 83% of ours and consensus estimate, respectively. Timber division earnings came in weaker than expected due to decline in plywood price. No dividend was declared in 4QFY16 (against 10 sen in 4QFY15) and we think that the Company may be conserving cash in view of challenging environment for the timber segment in FY17.

Timber division is affected by low plywood and export log prices. Timber division PBT tumbled 56% yoy to RM71.1m as plywood price declined 12%yoy to USD447 per m3 while export logs price dropped 12% to USD256 per m3. We believe that the low plywood price is caused by slowdown in Japan GDP which has expanded by only 0.2% in 4Q2016. Export logs demand may have been affected by slowdown in India economy.

Plantation division PBT improved yoy to RM105.7m. The division’s FY16 PBT surge of 38% yoy was caused by better CPO price (+12% YoY to RM2389/MT) and higher FFB production (+8% YoY to 491,423 MT). We believe that the momentum of earnings growth for plantation division should continue in FY17 as its FFB volume should continue to grow in view of its young age profile.

Lacklustre outlook for FY17. We are expecting lower export log volume in FY17 as the recent change in Sarawak regulations requires longer tenure of 25 year cycle (from 20 years) before a tree can be harvested. Main earnings contributor will be from plantation division in FY17. However, we only expect all in earnings growth of 2% in FY17.

Downgrade to NEUTRAL with adjusted TP of RM4.25. We have reduced our FY17 earnings by 10% after assuming lower price for plywood and export logs. Our Target Price is based on unchanged 16.6x Forward PER (mean valuation). Maintain NEUTRAL as any upside from plantation division is likely to be neutralised by weak earnings from timber division.

Source: MIDF Research - 1 Mar 2017