KEY INVESTMENT HIGHLIGHTS

• 2QFY20 normalised earnings rose to RM12.6m as the group benefited from higher CPO price (+21.0%yoy)

• 1HFY20 results jumped to RM21.4m (+80.5%yoy) which is within our and consensus expectation

• 2H20 earnings growth to be primarily driven by its plantation division on elevated CPO price

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

• Maintain NEUTRAL with a revised TP of RM2.59

Higher earnings momentum in 2HFY20. Ta Ann’s 2QFY20 normalised earnings surged by +224.0%yoy to RM12.6m. Cumulatively, the group’s 1HFY20 normalise earnings increased by +80.5%yoy to RM21.4m, mainly driven by the elevated CPO price of RM2,421/mt (+27.0%yoy). This came in within ours and consensus’ expectations, accounting for 27.7% and 30.6% of the respective full year FY20 earnings estimates. Moving forward, we expect the group’s financial performance in 2HFY20 to perform stronger due to the expectancy of higher CPO price. However, this could be partially moderated by lacklustre profit contribution of its timber segment on lower average selling price (ASP) of its timber products.

Expanding EBIT margin. The earnings momentum in the group’s 1HFY20 was mainly attributable to the increase in average ASP for CPO by +27.0%yoy to about RM2,421/mt respectively. Thus, the profit before tax (PBT) of the oil palm segment expanded by >100%yoy (refer to table 1) to RM40.7m in 1HFY20 from RM10.1m in the corresponding period of the prior year. This was in spite of the marginal decline in FFB production by -1.3%yoy to about 310.1k mt, which we consider as relatively resilient as compared to industry peers. Nonetheless, it was partially moderated by the weakening financial performance at its timber segment. As such, EBIT margin expanded by +3.8ppts yoy to 10.2%.

Sequential recovery in its timber segment performance albeit at slower pace. We remain less sanguine 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. Note that as at 1HFY20, the group’s ASP for its export logs and plywood declined by - 22.4%yoy and -9.6%yoy to USD191/m3 and USD479/m3 respectively. 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 drag the group’s earnings growth momentum.

Earnings estimates. We are revising our earnings estimates downward for FY20/21/22 to RM58.4m, RM77.9m, and RM90.0m respectively in view of the prolonged recovery MCO period and lower average selling prices of its timber products.

Target price. We are deriving a new target price of RM2.59 (previously RM2.44) by pegging its FY21 EPS of 17.5sen to target PER of 14.8x which is circa +1SD premium to the group’s 5-year historical average. The premium is taking into consideration of the more promising outlook of its plantation segment given the positive sentiments on CPO price.

Maintain NEUTRAL. We remain encouraged on the group’s FY20 outlook, premised on the favourable CPO price environment and gradual easing of lockdowns. The profit contribution from the oil palm segment is expected to achieve better growth, driven by expected higher ASP and relatively resilient FFB production in FY20. On the contrary, we expect the group’s timber segment to potentially experience tepid performance from the anticipated lower ASP and sales volume of its wood-based products from major importers such as India and Japan in the intermediate terms. This is based on the weakening economic indicators that could reduce development activities leading to reduced demand for its timber products. Moving forward, we believe that the well-being of the group will still be dependent on the Covid-19 situation and its effects on the economic activities in the short and medium terms. All in, we are maintaining our NEUTRAL recommendation on Ta Ann

Source: MIDF Research - 1 Sept 2020