INVESTMENT HIGHLIGHTS

• 1QFY19 core earnings of RM7.9m came in below ours and consensus expectations

• The lower average selling price (ASP) of CPO overwhelmed the sizeable increase in sales volume of export logs

• Earnings forecasts for FY19 and FY20 were reduced subsequent to our downward revision in CPO price

• Downgrade to NEUTRAL call with an adjusted TP of RM2.22

Earnings below expectations. Ta Ann’s 1QFY19 core earnings of RM7.9m came in below both our and consensus expectations, accounting for 6.8% and 8.4% of the full year FY19 earnings estimates respectively. The negative deviation was caused by lower-than-expected average selling price of crude palm oil which is partially mitigated by higher export logs sales.

CPO price remains depressed... Ta Ann’s 1QFY19 average CPO price dropped further by -19.0%yoy to RM1,931/mt, causing the profit before tax (PBT) of the oil palm segment to plunge by -56.3%yoy to RM4.2m. Meanwhile, the growth in FFB production of merely +4.0%yoy was insufficient to make up for the larger fall in CPO price. Moving forward, we do not expect significant recovery in CPO price.

…but partially offset the better timber segment. Ta Ann’s 1QFY19 PBT for timber segment came in higher at RM8.2m, as compared to loss before tax of–RM7.2m in 1QFY18. This was mainly due to the higher export logs sales which increased by +167.0%yoy to 15,472 m3. Given the higher export quota share and its reforestation investment, we view that the sales volume of export logs will continue to be on uptrend. Nonetheless, it wasn’t enough to mitigate the downfall in CPO price which has a larger adverse impact to the group’s bottom line.

Dividend. The group does not declare any dividend for the quarterunder-review as opposed to corresponding period in FY18, at 5sen. However, we maintain our dividend forecast of 10sen for FY19 in view of the group’s healthy net cash from operating activities and higher contribution from timber segment.

Earnings estimates. We cut our earnings forecast for FY19 and FY20 by -40.7% and -36.5% to RM68.7m and RM82.8m respectively, premised on the downward revision of our CPO price assumption.

Source: MIDF Research - 29 May 2019