• Maintain BUY, with a revised SOP-derived TP of MYR3.65, from MYR4.00, 22.5% upside with c.3% yield. FY19 earnings missed our and consensus expectations due to higher than expected losses incurred in the timber segment. We expect FY20F to be a better year for Ta Ann, coming from higher CPO prices and higher log exports as its forest certifications are due to complete by 1Q20.
   
• FY19 core earnings were below our/Street expectations, at 72-75% of FY19 projections, with 4Q19 recording only MYR7.6m in core profit (down 69% QoQ). This is due to losses posted in the timber segment (4Q PBT of -MYR12.9m) and weaker FFB production (-28% QoQ) which subsequently resulted in lower CPO sales volume (-9% QoQ). Hence, Ta Ann wasn’t able to report higher plantation earnings despite realising an average CPO price of MYR2,362.

• In FY19, Ta Ann recorded flat FFB output growth of 2.7% YoY, slightly below our 3% growth projection and management’s original 6% guidance. Moving forward to FY20, we forecast a FFB production growth of 7% YoY. This is lower than management’s guidance of 12%, as we believe the impact of dry weather back in 3Q19 and Ta Ann’s lower fertiliser application in FY19 should affect output in FY20.

• Management estimated that unit cost (including PK credits) would increase by 6% YoY in FY20 to MYR1,700/tonne, coming from higher fertiliser costs (as they have not applied the required fertilizer fully in FY19), and minimum wages. We have adjusted the forecast accordingly.

• Potential turnaround in plywood segment. On a brighter note, the Japanese local government has recently promoted and enforced the usage of certified timber products on their timber procurement policy and directives. This should bode well for Ta Ann as they are on track to certify their remaining FMU (130,000 ha) which would allow them to demand higher pricing for their plywood products. We forecast plywood exports in FY20F to 86,000 cu m (+5% YoY). However, due to the high cost structure, we expect the plywood division to remain in the red in FY20 before breaking even in FY21.

• We cut our earnings estimates for FY20F-FY21F by 7-12% after imputing higher unit cost assumptions and lower production volumes, as well as raising slightly the associate contributions. Correspondingly, we introduce FY22F earnings.

• Stay BUY, with a revised SOP-based TP of MYR3.65. We apply an unchanged 12x FY20F P/E for its timber segment and 16x for its plantation segment respectively. Our revised TP implies 15.7x FY20F P/E, at +1SD from its 5-year and 10-year historical average P/Es.

Source: RHB Securities Research - 3 Mar 2022