• Still NEUTRAL, new MYR3.55 TP, 9% downside with c.6% FY24F yield. 1Q24 net profit disappointed. While we expect better earnings prospects in 2H24 from improved timber productivity and reduced plantation unit costs, we believe valuations remain fair – Ta Ann is trading at 9x FY24F P/E, ie at the high end of its 7-10x peer range. The plantation division remains the key driver to earnings, comprising 92% of PBT.

• 1Q24 core profit missed our and Street expectations, at 15-17% of FY24F earnings on lower-than-expected log output (-17% QoQ, -35% YoY; our FY24 forecast: -6%) and higher-than-expected plantation unit costs. Management announced an interim dividend of MYR0.15 (1Q23: MYR0.10).

• 1Q24 timber PBT jumped 130% QoQ (-73% YoY). The QoQ improvement was driven by the log sub-segment, which got dragged by plywood sales. Despite lower log output, this segment saw higher sales volume (+12% QoQ, -34% YoY) and ASPs of USD220/cu m (+16% QoQ, -20% YoY). For FY24, management expects log output to grow 7% YoY from improved weather conditions. As YTD-April output has declined further to -37% YoY, we reduce our log output forecasts to -25% YoY for FY24 from -6% while maintaining 7- 9% growth for FY25-26. The plywood segment saw a decline in sales volume (-31% QoQ, +36% YoY) as Japan runs down stocks, while plywood ASPs were flattish at USD530/cu m (-2% QoQ, -18% YoY) in 1Q24. However, plywood demand should start picking up in 2H24 as restocking activities resume. We lower our ASPs by 4-5% to USD525–545/cu m in FY24-26 and cut our plywood sales volume to reflect a 19% decline in FY24 estimates from +3%, followed by +2-5% from -1% to +10% in FY25-26.

• The plantation unit’s 1Q24 PBT slipped 37% QoQ (-35% YoY) as FFB output fell 35% QoQ (-0.1% YoY) due to wet weather in Sarawak – offset by higher CPO ASPs (+9% QoQ). In YTD-April, FFB production showed a slight improvement to +1.3% YoY. TAH maintains its FFB production growth target at +5%, expecting production to recover in 2H24. We keep our FY24F FFB growth expectations at +3-6% for FY24-26. We estimate unit costs jumped 19% QoQ (-2.4%YoY) in 1Q24 due to weaker FFB output and higher manuring activities vs our original forecasts of -6% YoY for FY24. As such, we raise our unit cost assumptions by 5-6% for FY24-26.

• Keep NEUTRAL, new MYR3.55 TP based on a higher 11x 2024F P/E vs 10x previously after updating TAH’s historical peer range and including a 24% ESG discount. We cut our FY24F-26F earnings by 16-19% after imputing higher unit costs, lower log and plywood output, and decreased plywood ASPs. Positive/negative risks to our call include CPO price movements, weather, and demand and supply dynamics of the timber industry.

Source: RHB Research - 29 May 2024