Ta  Ann’s 1HFY13 core earnings fell  below  expectations,  due  to  larger volumes  of  higher  cost-bearing  Tasmanian  logs  processed  and  sold, which  resulted  in  larger  plywood  losses.  We  expect  a  lower  volume  of Tasmanian  products  in  FY14,  which  should  cap  plywood  losses,  while the  rising  log  and  plywood  prices  would  bode  well  for  the  company. Maintain BUY with lower SOP-based FV of MYR4.18 (from MYR4.37).  

- Below expectations. Ta Ann’s 1HFY13 core net profit of MYR6.8m was below our and consensus estimates, at 10-20% of FY13F numbers.  The main  variance  was  due  to  larger  volumes  of  the  higher  cost-bearing Tasmanian  logs  processed  and  sold  in  2Q13  (+61.6%  q-o-q  and  +76% y-o-y),  as  the  company  cleared  some  inventory  carried  forward  from 2012 - which resulted in its plywood unit’s larger losses of MYR12.7m in 2Q13  (+74%  q-o-q  and  +16.5%  y-o-y).  Ta  Ann  recorded  an  EI  gain  of MYR31m, comprising a compensation of +MYR62m from the Tasmanian government  for  the  reduction in  log  volumes  and  -MYR31m  impairment loss  on  property,  plant  and  equipment  (PPE)  for  its  Tasmanian operations.  We  expect  Ta  Ann  to  record  another  tranche  of compensation sometime in 2H13 (estimated at MYR20-30m).  

- 1HFY13’s core net profit fell 73.4% y-o-y on the back of a 0.7% dip in revenue.  Revenue  in  the  timber  division  fell  due  to  lower  log  volumes and  lower  plywood  prices,  offset  by  higher  log  prices  and  plywood volumes,  although  PBT  margins  fell  to  0.6%  (from  0.9%)  due  to  higher losses at the plywood division. The plantation division’s PBT  also dived by 63% as prices fell 31%, although production volume rose by 12%.

- Forecasts  cut.  We  have  cut  our  earnings  forecasts  by  22%  for  FY13, after imputing larger volumes of Tasmanian logs and higher losses at the plywood  division.  We  also  trim  our  FY14  forecast  by  5%.  We  expect  a lower  volume  of  Tasmanian  logs  in  FY14,  which  would  mean  smaller losses at the plywood division. 

- Maintain  BUY.  We  maintain  our  BUY  recommendation  on  Ta  Ann. Despite  the  weak  earnings  in  FY13,  we  believe  investors  should  look forward  to  FY14,  where  we  foresee  a  recovery  in  timber  industry prospects  on  the  back  of  increasing  economic  activity  in  Japan  and improving prices, as well as a continued rise in fresh fruit bunches (FFB) production  and  a  slight  pickup  in  crude  palm  oil  (CPO)  prices.  Post-earnings  revision,  our  SOP-based  FV  (16x  FY14  for  the  plantation  unit and  12x  FY14  for  the  timber  division)  has  been  lowered  to  MYR4.18 (from MYR4.37).  

Source: RHB