• Maintain BUY and MYR4.10 TP, 17% upside and c.7% FY24F yield. Although Ta Ann’s ESG transparency and disclosure are rather limited, they are already reflected in its TP. We continue to like TAH for its cheap valuation of 6.6x 2024F P/E, which is at the low end of its peer range of 6- 12x, while its 7.1% dividend yield is an added bonus.

• The European Union (EU) Deforestation Regulation (EUDR) is not unsurmountable. While there are a myriad of problems and issues in complying with the EUDR guidelines based on current regulations, we believe there are also numerous solutions. The Malaysian and Indonesian Governments working together with the EU to find solutions is a step in the right direction – especially if Malaysia and Indonesia are classified as “Low Risk”. Aligning definitions are key to achieving compliance and ensuring everyone is on the same page.

• The EU needs to help, otherwise this problem will be shifted elsewhere. At the end of the day, if the EU fails to help producing countries like Indonesia and Malaysia in complying with the EUDR, it will push producers to export more of their commodities to countries with weaker environmental regulations, thereby shifting the problem to other regions.

• A short term solution would be to ensure that whatever is sold to the EU is produced in segregated mills and refineries and traceable to plantation. This could mean redirecting smallholder crops that are not traceable to other mills to ensure there is no mixing of crops in each plant.

• Uplifting smallholders means uplifting the sector. As smallholders manage 40% of plantation areas in Indonesia and Malaysia, this sector will only progress if they are taken care of and well updated with the changes in laws and regulations. As discussed previously, the main hurdle of achieving traceability lies with obtaining data from third-party suppliers, including smallholders. In order to address this, continuous engagement with the smallholders is essential to educate them on the importance of establishing a sustainable business, while the necessary tools must be given to the smallholders to help them to achieve these goals.

• We believe the sector in general is moving in the right direction in terms of ESG standards, with more disclosure and targets being set. However, we note that there are some outliers which have yet to make any improvements to ESG disclosures as well as ESG targets.

• We make no change to our ESG score of 1.8 for TAH. Given the lack of disclosure over the past few years, we downgrade TAH’s “Governance” score but keep all other scores intact. However, the particular downgrade does not result in a change to its overall score given the lower weighting (25%) ascribed for Governance.

• Maintain BUY and TP of MYR4.10 based on 10x FY24F P/E and an ESG discount of 24%. TAH continues to trade at an inexpensive 6.6x 2024F P/E, which is at the low end of its peer range of 6-12x 2024F.

Source: RHB Securities Research - 21 Nov 2023