KEY INVESTMENT HIGHLIGHTS

• 4QFY19 normalised earnings fell -39.6%yoy to RM16.5m

• FY19 normalised earnings of RM50.4m (-31.9%yoy) came in below ours and consensus’ expectations

• Palm division’s earnings to be buoyed by elevated CPO price

• 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 an unchanged TP of RM3.06

Below expectations. Ta Ann’s 4QFY19 normalised earnings decreased by -39.6%yoy to RM16.5m. This led to the FY19 normalised earnings of RM50.4m (-31.9%yoy) which came in below ours and consensus’ expectations, accounting for 83.5% of the respective full year FY19 earnings estimates. Note that the normalised earnings include the fair value changes of biological assets. The lower earnings results were primarily due to the lower-than-expected ASP for export logs, plywood products, FFB and CPO.

Lower ASP negatively impacted FY19 earnings. The fall in the group’s FY19 earnings was mainly attributable to the drop in average ASP for export logs, plywood products and CPO by -29.0%yoy, - 4.0%yoy and -8.0%yoy to USD220/m3, USD530/m3 and RM2,052/mt respectively. Despite the higher sales volume achieved for export logs and CPO by +120.0%yoy and +23.0%yoy to 94,495m3 and 251,649mt respectively, it still wasn’t sufficient to mitigate the faster pace of decline in ASP. As a result, this led to lower earnings.

Expect better FY20 financial performance. In view of the elevated CPO price in FY20, we opine that this is expected to lead to a strong recovery of earnings from its palm oil division. This is primarily due to the expected lower inventory stockpiles amidst a tighter production in both Malaysia and Indonesia. We also believe that the outlook of the group’s timber division to be promising in FY20 as driven by the expected higher ASP of wood-based products and sales volume in FY20. This is predominantly predicated on the additional 130,000ha of forests to be certified at end 1QFY20 and favourable policies which will help increase the ASP and sales volume in FY20. Moving forward, we are of the view that these developments would bode well with the earnings momentum of the group.

Earnings estimates. We are maintaining our earnings estimates for FY20 and FY21 as well as introducing our new set of earnings forecast for FY22.

Source: MIDF Research - 2 Mar 2020