While we expect Ta Ann to benefit from the higher CPO price environment and its FFB growth trajectory, this would be offset by the rising risk of MYR/USD trend reversal as well as lower log and plywood prices. We maintain our NEUTRAL stance with a SOP-based TP of MYR5.93 (from MYR5.91, 5% upside). With the 6M price performance of >60% on both absolute and relative terms, we believe it is time to lock in some profits, given the earnings risks ahead.

Earnings risks emerge. While we still expect earnings growth for Ta Ann in FY16 on the back of higher CPO prices, stronger FFB production and a weaker MYR/USD assumption (4.34 vs 3.90 in FY15), earnings risks are emerging from the reversing trend of the MYR/USD as well as weaker log and plywood prices. Flattish production for logs, but stronger FFB production. Its log production fell 15% YoY in FY15 from the impact of the clampdown on illegal logging in Sarawak which slowed down processes, while FFB production grew 12%. We expect log production to remain relatively flattish going into FY16-17, at 1-3% growth, which may translate to flattish sales volumes for log and plywood. However, we expect FFB production to grow 10-15% pa, on the back of rising land maturity. We do not expect El Nino to impact FFB production too significantly, as rainfall shortage in Sarawak then was relatively minimal.

SWOT Analysis

Source: RHB Research - 23 Feb 2016