• Still BUY, TP drops to MYR4.10 from MYR4.20, 13% upside with c.6% FY23F yield. Ta Ann’s 1H23 earnings came in below our and Street estimates. As the high output season has begun, we are optimistic that the company will book stronger earnings in 2H. We believe this counter remains undervalued at 6.8x FY24F P/E vs the peer range of 7-11x, while its FY23F c.6% dividend yield is another plus.

• 1H23 core earnings of MYR65.8m (-61% YoY) missed our and consensus expectations, at 32-38% of full-year forecasts. The deviation mainly came from weaker-than-expected log output and plywood sales volumes.

• Timber unit’s PBT plunged 49% YoY to MYR25.2m in 1H23, mainly dragged by the underperformance of its plywood division. The plywood ASP fell by 16% YoY while its sales volume decreased by 44% YoY. We understand that the weakening of the JPY has led to slower plywood demand for the past few months. However, as the inventory becomes tight, the demand for imported plywood in Japan has improved – seen by a 27.5% QoQ increase in sales volume in 2Q23. Demand for logs remains robust, as TAH’s sales volume rose 35% YoY, while log output weakened 13% YoY. While we think its log output should improve HoH, our +11% FY23 log output YoY growth projection has been too bullish – so we cut this to +5% YoY. We also slash our plywood sales volume forecast for the year to 53k cu m (from 112k cu m) to more accurately reflect its 1H23 performance. There are no changes to our log and plywood ASP assumptions.

• Its oil palm division’s 1H23 PBT plunged by 63% YoY on the back of lower CPO ASPs (-37% YoY) while FFB output fell 8% YoY, ie below management’s guidance of +16% YoY and our forecast of -3.7% YoY for FY23. In 7M23, FFB output growth slightly improved to -6.3% YoY, as the high output season has begun. Management has slashed its FY23F output growth guidance to +7% YoY. We remain conservative, and keep our -3.7% YoY growth forecast at this juncture.

• Better 2H expected. CPO ASP realised was MYR3,806 in 1H23 (-37% YoY), which was slightly below our FY23 forecast of MYR3,900. Unit cost was MYR2,300/tonne in 1H23 and management is guiding for the full-year unit cost to be c.MYR2,200/tonne, ie lower HoH in 2H. Despite lower ASPs YoY, we think this segment will record stronger numbers in 2H, on the back of higher output. We make no changes to our estimates for this segment.

• We cut FY23-25F earnings by 2-14% as we lower assumptions on log output and plywood sales volumes, as well as share of associates’ profits.

• Reiterate BUY, with a new MYR4.10 TP based on an unchanged 10x FY24F P/E, after including a 24% ESG discount based on its ESG score of 1.8 out of 4 (our country median is 3 out of 4). TAH is trading at a cheap 6.8x FY24F P/E vs its peer range of 7-11x, while its FY23F yield of c.6% serves as an additional sweetener for investors.

Source: RHB Securities Research - 1 Sept 2023