KEY INVESTMENT HIGHLIGHTS

• 9MFY19 normalised earnings of RM34.3m (-24.2%yoy) came in better than anticipated

• The timber business segment outperformed in view of higher-than-expected sales volume of export logs

• The palm oil business is negatively impacted by the deteriorating average selling price (ASP) of CPO

• Timber business expected to play a more prominent role to the group’s earnings in view of the higher export log quota

• Maintain NEUTRAL with a revised TP of RM2.50

Earnings above expectations. Ta Ann’s 3QFY19 normalised earnings of RM23.3m (-23.7%) was above our expectation due to its timber segment’s increased sales volume of export logs. This led to 9MFY19 normalised earnings of RM34.3m (-24.2%yoy) which came in above our expectations as well, accounting for 90% of the full year FY19 earnings estimates. The improved earnings results were primarily due to the higher-than-expected third quarter’s sales volume of export logs. Meanwhile, the palm oil business contracted in view of low CPO price.

Decline in 9MFY19’s earnings due to low CPO price. The fall in the group’s 9MFY19 earnings was mainly attributable to the drop in average CPO and FFB selling price by -17.0%yoy and -19.0%yoy respectively as well as the lower sales volume for plywood products by -39.0%yoy. However, the increase of its 3QFY19’s export logs of +201.0%yoy has partially mitigated the sustained low CPO price. As such, we opine that the higher pace of growth in sales volume of export log has contributed to the increased earnings contribution from its timber segment.

9MFY19’s revenue continues to decline. Ta Ann’s 9MFY19 revenue fell by -9.0%yoy to RM662.9.0m. This was mainly attributable to the drop-in revenue from the timber and oil palm segment by -18.7%yoy and -3.0%yoy to RM224.2m and RM438.4m respectively. This mainly was mainly due to the lower plywood sales volume by -39.0%yoy and weaker ASP of CPO and FFB by -19.0%yoy and -17.0%yoy respectively. Consequently, the 9MFY19 profit before tax (PBT) for the oil palm segment plunged by -23.7%yoy to RM52.7m (Table 1).

Expecting a better 4QFY19. The higher export logs quota from 20% to 40% would possibly see a continual increase of sales volume for export logs in 4QFY19. As a result, we are expecting the group to have an increase of profit contribution coming from its timber segment. The group’s timber segment has recorded a higher 9MFY19’s PBT growth of RM19.2m (+256.0%yoy) as compared to the drop in its oil palm segment. In addition, we opine that the recent recovery of CPO price to approximately RM2,400/mt-RM2,500/mt into 4QCY19 is expected to partially support the group’s full year earnings performance.

Earnings estimates revised upwards. We are revising our earnings forecast upward for FY19 and FY20 to RM60.4m and RM93.3 respectively. This is premised on the higher-than-expected sales volume of CPO, export logs and plywood which resulting in an upward revision of our sales volume assumption respectively.

Target price. Subsequent to our earnings revision, we are deriving a new target price of RM2.50 (previously RM2.18) by pegging its FY20EPS of 20.9sen 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 as of 9MFY19 which had drastically impacted the oil palm segment’s profitability. Historically, the oil palm segment accounted for more than 95% of the PBT. However, profit contribution from the timber segment is gaining traction as seen in its latest quarterly earnings result. Moving forward, we are of the view the recent recovery of CPO price in 4QCY19 would help to partially support the earnings contribution from its oil palm segment. In addition, the higher export logs quota is expected to continue to support the group’s profitability. However, the expected lower production of products such as CPO and FFB coupled with continued decline in the ASP of export logs remains as key concerns as well. In addition, no dividend has been proposed yet as compared to 5sen during the corresponding period in FY18. All in, we are maintaining our NEUTRAL recommendation on Ta Ann.

Source: MIDF Research - 21 Nov 2019