We cut our log price assumptions to reflect a YoY decline from FY15, from an increase previously. The sharp depreciation of INR against USD hasled to escalating costs for Indian log importers, which have started downtrading to other lower-cost sources – and led to lower log prices. The stronger MYR is a larger isk, given Ta Ann’s sensitivity, where every MYR0.10/USD change could impact earnings by 10-12%. Downgrade to NEUTRAL, with a higher TP of MYR5.91 (from MYR5.20, 9% upside), afterwe fine-tune our DCF assumptions.

Softening log prices. Myanmar’s ban on log export in Apr 2014 and the statewide clampdown on illegal logging at the end of the same month sent log prices rising for nine consecutive months since that period. However, log prices have started retreating since Oct 2015, as escalating log costs led buyers from India to start sourcing for lower-cost logs. Meranti log prices averaged lower at USD283 per cu m in 4Q15, vs USD291 per cu m in 9M15. We think current lower prices would be the case going forward, as log suppliers attempt tosustain buying interest from India – its single largest export market.

Raising estimates. We trim our log price assumption by 2-3% to reflect a decline in FY16F (from a price rise projection of 2-3% previously) before expecting a recovery of the same quantum in FY17. However, we lift our FFB production by 1-2% in FY16-17 in view of stronger-than-expected FFB production in FY15. The relatively muted El Nino effect in Sarawak – as seen in the slight rainfall deficit in 2Q15 and 3Q15 compared to its long-term rainfall average – could mean that FFB production may be less affected in FY16. All in, we raise our FY15 earnings estimates by 9% and FY16-17 forecasts by 3-6%.Downgrade to NEUTRAL with a higher TP of MYR5.91. Ta Ann’s share price has risen 35-40% in the past three to four months. We think this is a good time for investors to take profit as the emerging weakness in log prices, lacklusterplywood demand and the strengthening MYR are expected to offset the benefit of higher FFB production and pose earnings risks going forward. With the earnings revision and after fine-tuning our DCF assumptions for the log division and tweaking our MYR/USD assumptions for FY16 to 4.34 (from 4.30) to reflect the latest house view, we raise our SOP-based TP to MYR5.91. We make no changes to our target P/E of 16x for its oil palm plantation segment,

replacement value calculation for its plywood unit and CPO price assumptions. Main risks. These are: i) a continuous rebound of MYR against USD, ii) deterioration in Japan’s economic recovery which results in a decline in the country’s housing starts, iii) log production recovering in a significant manner from Malaysia or if Indonesia lifts its ban on log exports, and iv) the imposition of import duties by large export markets like India and Japan.