• Maintain NEUTRAL and TP of MYR2.95, 10% downside with c.8% FY23F yield. While Ta Ann’s earnings could be dragged by declining CPO prices, its above-average dividend yield remains attractive and should provide support for its share price. TAH is fairly valued – it is trading at 7x, ie within its peer range of 6-9x.

• Softening ASPs for both log and plywood sub-segments. TAH’s log ASP has fallen to USD250-260/cu m (from USD280/cu m in 1Q23) as the influx of log supply from Sabah to India has resulted in downward pressure, although sales volumes have been relatively stable. Its plywood ASP also weakened to USD550/cu m in April-May (from USD649/cu m in 1Q23) as competitors cut prices to offload their excess inventory, while the weakening JPY also dampened sales volumes. Although TAH’s YTD-May log output dropped by 11% YoY, management is keeping its FY23 log output growth forecast at 15% YoY, as it expects production to pick up in the coming quarters when the weather improves. We keep our FY23F log ASP at USD270/cu m and volume growth at 11.6% YoY, but cut projections on plywood ASP and cost per cu m to USD580 (from USD685) and USD500 (from USD580) to be more in line with current levels.

• Management is keeping its 12% YoY FY23 FFB production growth target, despite recording a YTD-May FFB growth of -8.8%. FFB output picked up from May (+9% QoQ), and is expected to recover significantly in 2H, with a 1H:2H output ratio of 40:60. TAH’s labour shortage is now at 10%, alleviated by contract workers. It took in 300 new foreign workers, with another 100 more expected to come in after the end of June. These workers are unlikely to be work-ready for the peak output period in 3Q, so TAH plans to reallocate its available manpower to focus more on harvesting during the peak season. We maintain our more conservative FY23F FFB growth forecast at 6.9% YoY.

• CPO unit cost was MYR2,460/tonne in 1Q23, flattish YoY. Management expects FY23 unit costs to drop to c.MYR2,100/tonne on the back of higher 2H23 output. TAH’s 1H23 fertiliser purchases saw a 17% YoY decrease in prices, and it expects 2H23 fertiliser prices to be similar. It has applied c.30% of its fertiliser requirement to date. We maintain our unit cost forecast of MYR2,600-2,800/tonne, to be conservative.

• Minimal capex equals sustainably high dividend yields. TAH has allocated MYR70m for FY23 capex, which includes planned replanting of 2,000ha. With MYR201.9m net cash in its balance sheet (end-1Q23) and operating cash flow of MYR300-500m, we think the company should be more than able to consistently pay out 51-53% of earnings, yielding sturdy FY23-25F dividend yields of 7-8%.

• We tweak FY23-25F earnings by -0.5% to +2.7% as we pare down our assumptions on log unit costs and plywood ASPs and unit costs.

• Our unchanged TP of MYR2.95 is based on an unchanged 8x FY23F P/E, after including a 24% ESG discount based on its ESG score of 1.8. This counter is trading in line with its peer range of 6-9x.

Source: RHB Research - 30 Jun 2023