KEY INVESTMENT HIGHLIGHTS

• 3QFY20 normalised earnings rose to RM40.6m (+74.2%yoy), mainly due to higher CPO price (+30.6%yoy)

• 9MFY20 results jumped to RM61.9m (+84.3%yoy) which came in above our and consensus expectation

• Elevated CPO price combined with a higher CPO sales volume to drive plantation earnings momentum

• Anticipated recovery in demand and ASP of timber products to lend further impetus to earnings prospects growth

• Upgrade to BUY with a revised TP of RM3.83

Above expectation. Ta Ann’s 3QFY20 normalised earnings increased by +74.0%yoy to RM40.6m on higher CPO price of RM2,605/mt (+30.6%yoy). Cumulatively, the group’s 9MFY20 normalise earnings surged by +84.3%yoy to RM61.9m, mainly driven by the elevated CPO price of RM2,497/mt (+28.4%yoy). This came in above ours and consensus’ expectations, accounting for 90.6% and 83.0% of the respective full year FY20 earnings estimates. Moving forward, we expect the group’s 4QFY20 earnings to remain above RM40.0m due to the expectancy of higher CPO price and sequential recovery in both demand and average selling price (ASP) of its timber products.

Plantation segment to be the main earnings driver. The profit before tax (PBT) of the oil palm segment expanded by >100%yoy to RM112.7m in 9MFY20. This was primarily attributable to the higher CPO price of RM2,497/mt (+28.4%yoy) and higher CPO sales volume at 199.2k mt (+10.6%yoy). This was in spite of the marginal decline in FFB production by -5.1%yoy to about 537.8k mt, which we consider as relatively resilient as compared to industry peers. We also posit that the earnings contribution from this segment to continue to be promising, premised on higher CPO price.

Timber segment to turnaround. Albeit this segment remains in a loss-making position with a LBT level of -RM2.7m in 9MFY20 on lower ASP of timber products, we postulate that it will turnaround in possibly 4QFY20 in view of the expected higher ASP of wood-based products and sales volume moving forward. Note that the group’s ASP for its export logs and plywood declined by -17.2%yoy and -13.0%yoy to USD192/m3 and USD476/m3 respectively in 9MFY20. However, this was partially mitigated by the increase in sales volume of its export logs and plywood by +5.5%yoy and +10.1%yoy to 76.1k(m3 ) and 64.5k(m3 ) respectively. In addition, we expect the group’s additional 130,000ha of certified forests to contribute to higher production in meeting the promising demand recovery in plywood from Japan. Coupled with an anticipated recovery in logs prices in the Indian market, we foresee a stronger earnings prospect from this segment, which in turn could further drive the group’s earnings momentum.

Dividend. The group has declared the first interim single tier dividend of 10 sen per ordinary share for FY20 to be payable on 12 Jan 2021. This is in line with our expectation.

Earnings estimates. We are revising upwards our earnings estimates for FY20/21/22 to RM102.0m, RM114.2m, and RM124.4m respectively. This is mainly premised on our upward revision of our assumption on the ASP and sales volume of timber products as well as inputting a higher CPO sales volume.

Target price. We are deriving a new target price of RM3.83 (previously RM2.97) by pegging its FY21 EPS of 25.9sen to an unchanged 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 and a better prospect for the timber business.

Upgrade to BUY. We are optimistic on the group’s earnings outlook moving forward, predominantly premised on the favourable CPO price environment and an anticipated steady recovery from its timber segment. The profit contribution from the oil palm segment is expected to achieve stellar growth, driven by expected higher ASP and relatively resilient FFB production as well as higher CPO sales volume moving forward. In addition, we expect the group’s timber segment to potentially turnaround given an anticipated higher ASP and sales volume of its wood-based products from major importers such as India and Japan on the resumption of major economic activities. This will further drive the earnings momentum of the group. All in, we are upgrading our recommendation on Ta Ann to BUY from NEUTRAL previously.

Source: MIDF Research - 1 Dec 2020