INVESTMENT HIGHLIGHTS

• 1HFY19 core earnings of RM11.0m (-25.2%yoy) came in below ours and consensus expectations

• This was mainly due to the lower average selling price (ASP) of CPO and FFB as well as a weaker sales volume for plywood products

• Earnings forecasts for FY19, FY20 and FY21 revising downward in view of weaker financial performance

• Maintain NEUTRAL with a revised TP of RM2.18

Earnings below expectations. Ta Ann’s 1HFY19 core earnings of RM11.0m (-25.2%yoy) came in below both our and consensus expectations, accounting for 16.0% and 21.0% of the full year FY19 earnings estimates respectively. The weaker earnings result was caused by lower-than-expected average selling price of CPO and FFB as well as lower sales volume for plywood products.

Revenue on the downtrend. Ta Ann’s 1HFY19 revenue fell by -8.4%yoy to RM216.0m. This was mainly attributable to the drop in revenue from the timber and oil palm segment by -14.7%yoy and -11.3%yoy to RM148.3m and RM246.4m respectively. This mainly was due to the lower plywood sales volume by -34.0%yoy and weaker ASP of CPO by -21.0%yoy respectively. Consequently, the 1HFY19 profit before tax (PBT) for the oil palm segment plunged by -65.6%yoy to RM10.1m.

Expecting a better 2HFY19. The higher export logs quota from 20% to 40% would possibly see an increase of sales volume for export logs in 2HFY19. As a result, we are expecting the group to have a higher profit contribution coming from its timber segment. As a matter of fact, the group’s timber segment has recorded a higher PBT of RM13.2m as compared to RM10.1m from its oil palm segment. In addition, the recent recovery of CPO price to approximately RM2,000/mt into 3QCY19 is expected to partially support the group’s earnings performance. However, we are of the view that the improvement in earnings would be limited.

Earnings estimates cut further. We are revising our earnings forecast downward for FY19, FY20 and FY21 to RM37.9m, RM80.9m and RM100.5 respectively. This is premised on the lower-than-expected ASP of CPO, export logs and plywood which resulted in a downward revision of our price assumption.

Target price. Subsequent to our earnings revision, we are deriving a new target price of RM2.18 (previously RM2.22) by pegging its FY20EPS of 18.20sen to target PER of 12.0x which is about the group’s 5-year historical average.

Maintain NEUTRAL. While we remain optimistic about the outlook of the group’s timber segment, it still could not compensate for the sustained weak CPO price environment which had drastically impacted the oil palm segment’s profitability. Historically, the oil palm segment accounted for more than 95% of the PBT but now PBT from the timber segment is gaining traction. Moving forward, we also view that the recovery in CPO price would not be significant. Thus, we expect earnings from the plantation division to remain subdued. However, the higher export logs quota is expected to partially support the group’s profitability. All in, given the lacklustre earnings performance and weak CPO price, we are maintaining our NEUTRAL recommendation on Ta Ann.

Source: MIDF Research - 29 Aug 2019