Ta Ann has entered into two JV agreements with Pelita Holdings to develop two NCR land parcels totalling 28,195ha into palm oil plantations. Maintain BUY and MYR4.70 TP (23% upside). Ta Ann will have to fork out MYR50.7m for its 60% stake in these JV companies, which works out to be a reasonable MYR4,995/ha. We do not have high hopes for the JVs as NCR developments tend to have a high failure rate.

Two native customary rights (NCR) joint ventures (JVs). Ta Ann has entered into two JV agreements with Pelita Holdings SB (PHSB) to implement oil palm development projects in partnership with the Sarawak state government and NCR owners. The JVs are to develop: i) parcels of NCR land in Kanowit, Sibu with a gross area of 17,017ha, of which 10,210ha are plantable area, and ii) parcels of NCR land in Batang Rajang/Batang Baleh, Kapit with a gross area of 11,178ha, of which 6,707ha are plantable. Ta Ann will have a 60% stake in the JVs, while NCR owners will own 30% and the state government 10%.

Outlay of MYR50.7m. The projects are replacement projects for the JVs that Ta Ann entered into with Pelita Holdings in 2012, which were subsequently cancelled. No capital or investment outlay has been made at this stage, as this will be incurred on a staggered basis depending on the progress of participation by the NCR owners. However, eventual issued capital of the JVCs will be MYR51m for the Kanowit JV and MYR33.5m for the Kapit JV. We estimate Ta Ann’s outlay will therefore be MYR50.7m.

Reasonable pricing. Based on this price, Ta Ann is paying approximately MYR4,995 per plantable ha for this greenfield land, which is a reasonable price to pay, in our view, in line with other NCR land transactions. This will bring Ta Ann’s plantable landbank to 100,094ha (a 20% increase). However, we would not put too much hope on the JVs at this juncture, given the relatively high failure rate of NCR land development projects in Sarawak.

Maintain BUY and MYR4.70 TP. Given the continued strength in log dynamics (stable demand and improving prices), profits from the plywood division, as well as growing palm oil plantation contribution, we maintain our BUY recommendation with an unchanged SOP-based TP of MYR4.70.

Recommendation Chart

Source: RHB Research - 23 Jun 2015