• Downgrade to NEUTRAL from Buy, new MYR5.70 TP from MYR6.40, 2% upside with c.7% yield. Lower sales volumes across all divisions resulted in Ta Ann’s 1Q22 earnings coming in below our expectations. With the run-up in its share price over the last 12 months, we believe it is time to take profit. This counter is trading at a fair 7.9x FY23F P/E, in line with its peer range of 6-10x.

• 1Q22 earnings missed our expectations but was in line with the Street estimate (19% of our and 25% of Street FY22F earnings), mainly due to lower sales volumes across all segments. Management declared a DPS of MYR0.10, bringing 1Q22 net DPS to MYR0.15.

• The timber unit remained strong, as its 1Q22 PBT of MYR22.3m (+403% YoY) was mainly contributed by higher log (+13% YoY) and plywood (+39% YoY) prices, offset by lower sales volumes for logs (-14% YoY) and plywood (-2% YoY). Although 1Q22 log production volume (+48% YoY) was slightly above our estimate, sales volumes were lower than expected as TAH seemed to only export 24% of its log output in 1Q22 (vs our projected 40%). We lift FY22F log production by 13%, but reduce our sales volume assumption by 28%, to be in line with 1Q.

• In 1Q22, FFB growth dropped 3% YoY, below our assumptions of +8.8% YoY and management’s guidance of +11% for FY22. TAH’s labour shortage was at 30% in 1Q22. TAH has managed to alleviate this shortage somewhat by hiring contract workers, which reduced the shortage to 10% currently. To be conservative, we have revised down our FY22-24F FFB growth to 1-5% (from 1-9%), as well as external FFB purchased projections by 1.2-4.5%.

• Higher CPO ASPs achieved, but still below Malaysian Palm Oil Board (MPOB) averages. Despite higher CPO ASPs of MYR5,550 (48% YoY) in 1Q22, this was still lower than MPOB’s MYR6,183/tonne. We understand this was due to lower external FFB supply caused by labour shortages in Sarawak, which resulted in a delay in fulfilment of orders. TAH would then have to fulfil the backlog of orders the following month, at last month’s agreed price. This was detrimental to TAH in a rising CPO price environment, involving 55% of its sales volumes in 1Q22. This may recur in 2Q22, if the labour shortages are not resolved and if CPO prices rise.

• We raise our CPO price per tonne assumptions to MYR5,300 (from MYR4,500) for FY22, and to MYR4,300 (from MYR3,600) for FY23, while our FY24F CPO price remains at MYR3,500/tonne. Together with the abovementioned changes, our FY22-24F earnings are revised by -13% to 12.9%.

• Cut to NEUTRAL with a lower MYR5.70 TP based on 10x FY23F P/E, after including a 20% ESG discount based on its ESG score of 2.0. We believe TAH is fairly valued. It is trading in line with its peers, although its 2022F dividend yield of c.7% should provide support to its share price.

Source: RHB Research - 24 May 2022