Following a sector-wide CPO price  downgrade, we  lower  our earnings projections for Ta Ann  by 22.9% for FY14 and 28.2% for FY15. We  slashour  FV  to  MYR3.80  (from  MYR5.40)  and  downgrade  the  stock  to NEUTRAL. Despite its  decent  projected annual  FFB production growth of 10-20%  over the next few years, this would  not be enough to offset the impact of lower CPO prices, given  its  significant sensitivity to CPO prices.

Downgrading  sector-wide  CPO  prices.  We  are  downgrading  the Malaysian  plantation  sector to  NEUTRAL  (from  Overweight). Our  CPO price assumptions  are  lowered  to MYR2,400/tonne  (from MYR2,700) for CY14 and MYR2,500/tonne (from MYR2,900) for CY15. 

Palm oil prices close to bottom. We believe palm oil prices are weeks away  from  a  bottom  and  should  strengthen  in  4Q  as  well as  in  CY15. That said, the current low levels  would  pull down  the full-year average,which justifies the cut in our assumptions. 

We  expect  prices  to  strengthen  in  4Q14  and  2015,  due  to:  i)  the seasonal slowdown in production in 4Q14. S ince 2000, CPO prices have risen by 11% from end-Sept to end-Dec, ii) the slower-than-expected offtake  for  biodiesel  in  Indonesia  in  2014,  caused  by  pricing  issues,  no longer applies  while  distribution infrastructure  is  being  developed, which should see Indonesia’s B10 programme in full swing  in 2015, and iii) the downside for soybean prices  is limited as it is already tradi ng at or near production cost. While the stock/usage ratio will be high this year (>30%) due to the US bumper crop, such high ratios usually do not persist.  

Reducing  forecasts.  We  are  reducing  our  forecasts  for  Ta  Ann following  the  sector-wide  price  cut  by  22.9%  for  FY14  and  28.2%  for FY15. Our CPO price assumptions are MYR2,400/tonne for FY14  (from MYR2,700) and MYR2,500/tonne for FY15 (from MYR2,900). 

Downgrade  to  NEUTRAL.  Our  SOP-based  FV  is revised  to  MYR3.80(from  MYR5.40)  based  on  unchanged  target  P/E  of  16x  CY15  for  its plantation division and 12x CY15 for its timber division. We downgrade our  recommendation  to  NEUTRAL  (from  Buy).  Despite  Ta  Ann’sestimated  strong  FFB production growth of 10-20% per annum  over the next few years, this would  not be  enough to offset the impact of lower CPO prices, given its significant sensitivity to CPO prices, whereby every MYR100/tonne  change  in  CPO  prices  will  affect  earnings  by  7-9%  per annum.

Source: RHB