INVESTMENT HIGHLIGHTS

• FY18 core earnings of RM79.5m exceeded our and consensus expectations

• Higher average selling price (ASP) of export logs and plywood buoyed the profitability of timber division

• Going forward, timber division will be the main growth driver, reaping the benefits from its reforestation

• Reiterate BUY call with revised TP of RM3.49

Earnings exceeded expectations. Ta Ann FY18 core earnings of RM79.5m exceeded expectations, accounting for 123.1% and 112.3% of our and consensus full year FY18 earnings estimates respectively. This was mainly due to the higher ASP of export logs and plywood during the period, arising from firm demand of timber products. Despite the weak CPO price weighed down on profitability from the plantation division, the group’s earnings remained strong and performed well above market expectation. Moving forward, we expect that the timber division continue to be the main earnings growth driver.

Favourable operational statistics. Timber division performance improved significantly in FY19 with PBT of RM4.8m (+21.7%yoy). This can be attributed to two main factors: (i) Higher ASP for export logs and plywood which increased by +14.2%yoy and +21.2%yoy respectively and, (ii) a surge in timber export volume after the increase in export quota from 20% to 40% for its Kapit Forest Management Unit (FMU), covering 149.7k ha. Coming FY19 and FY20, the company is said to complete two more FMU certification programmes (i.e. Raplex FMU and Pasin FMU), bringing the total area size of around 228.4k ha to be certified this year. As a result, we believe the export log volume to be on the uptrend, coupled with higher ASP due to firm demand, especially from India, the company’s timber division will experience phenomenal growth going forward. Reaping the benefits from its reforestation investment decade ago, as those trees are largely matured today and to be harvested in FY19 and FY20.

Plantation division remains key profit contributor. FY18 PBT declined -37.4% yoy to RM117.4m. This was mainly due to the lower CPO price by -34.0% yoy to RM2,128 per tonne and decline in FFB volume of -33.0% yoy to 741.5mmt. We view that with signs of gradual recovery in CPO price and a relatively young matured plantation area which typically have a higher FFB yield per ha, earnings from plantation division will improve going forward.

Source: MIDF Research - 1 Mar 2019