KEY INVESTMENT HIGHLIGHTS

• 1QFY20 normalised earnings rose to RM11.6m as the group benefitted from higher cpo price

• Note that 1QFY20 average CPO price ascended by +34.0%yoy to RM2,587/mt

• Nonetheless, this was still below ours and consensus expectation as the timber segment underperformed

• Outlook for the timber segment to remains tepid throughout FY20 due to potential lower ASP and demand destruction

• Maintain NEUTRAL with a revised TP of RM2.44

Earnings dragged by the lower contribution from the timber business. Ta Ann’s 1QFY20 normalised earnings surged by +66.3%yoy to RM11.6m. Note that the normalised earnings exclude the fair value changes of biological assets. This came below ours and consensus’ expectations, accounting for 12.2% and 10.7% of the respective full year FY20 earnings estimates. The increase in earnings was primarily due to the average higher CPO price. While the group’s first quarter results historically tend to be weaker, we expect 1QFY20 to perform stronger due to higher CPO price. The underperformance was largely stemming from its lacklustre profit contribution of its timber segment where we had expected a much stronger growth.

Resilient EBIT margin. The earnings momentum in the group’s 1QFY20 was mainly attributable to the increase in average ASP for CPO by +34.0%yoy to about RM2,587/mt respectively. Thus, the profit before tax (PBT) of the oil palm segment expanded by >100%yoy (refer to table 1) to RM12.9m in 1QFY20 from RM4.2m in the corresponding period of the prior year. This was in spite of the marginal decline in FFB production by -3.5%yoy to about 137.0k mt, which we consider as relatively resilient as compared to industry peers. In addition, it was also partially moderated by the weakening financial performance at its timber segment. As such, EBIT margin expanded marginally by +1.1ppts yoy to 10.4%.

Covid-19 to dampen its timber segment performance. We are now less optimistic on the outlook of the timber division in view of expected lower ASP of wood-based products and sales volume in FY20. The weakening economic indicators and potential intermittent lockdowns could potentially reduce the demand and ASP of its timber products especially from its major export markets such as India and Japan. Competition emanating from Indonesia’s plywood products could also serve as another dampening factor. Thus, we expect the group to be more attentive in churning out production out of its additional 130,000ha of forests which expected to be certified as at the end of 1QFY20. Moving forward, we opine that this could potentially put a dent in the group’s earnings growth momentum.

Source: MIDF Research - 1 Jun 2020