Ta Ann Holdings Berhad (“TAANN”)

Brief Background

TAANN is a resource-based company which based in Sarawak, Malaysia.

Since its formation in the mid-1980s as a forest concession licensee, TAANN had diversified its activities from logging operations into shipping, downstream timber processing, reforestation, oil palm plantations and the milling of crude palm oil. It had committed to sustainable management of forest resource and a pioneer in reforestation in Sarawak

In Feb 1997, TAANN was incorporated as a public limited company and subsequently listed on the Main Board of Bursa Malaysia on November 1999.

In year 2000, it diversified into oil palm plantation business and further expanded downstream wood processing activities overseas in year 2007.

In short, TAANN core business activities can be divided into 2 main segments:

• Timber products - Timber concession license, trading of logs, manufacture and sale of sawn timber, veneer, plywood and other timber products.

• Plantations - Oil palms and reforestation.

Plywood

Financial Highlights

TAANN revenue had been improved significantly from FY12 to FY15, from MYR797m to MYR1.05b, which equivalent to compound annual growth rate (“CAGR”) of 9.50%.

In term of net profit, TAANN was performing well too, from MYR58m in FY12 to MYR185m in FY15, which equivalent to CAGR of 47.19%!

FYI, there is a one-time compensation payment of approximately MYR17m in FY14.

The overall excellent result in FY15 was contributed by stable earnings growth in the plantation division due to an increase in fresh fruit bunch (“FFB”) output. Its crude palm oil (“CPO”) production had also grown with the commencement of operations at its newly commissioned Igan mill. Besides, its log prices were benefited from Myanmar’s export ban which restrained the overall supply of tropical hardwood.

Other than increase in production, the higher logs, plywood average selling prices and strengthening of USD against MYR are also one of the main factors for its excellent result.

Other than that, its Tasmania operation which had started to generate profit in year 2015 is reporting higher profit too. FYI, in year 2014, TAANN had installed a new plywood line with 48,000 cubic meters per year capacity to complement its veneer production in Tasmania. It had progressed smoothly and started commencement of operations in the first half of year 2015.

TAANN’s revenue contribution in FY15 is from timber products segment, which is up to 56%, followed by plantations segment 44%. In term of profit, timbers products contributed 60% of total profit while plantations segment contributed the remaining 40%.

In term of segmental revenue, TAANN revenue contribution from timber products had soften in FY15Q4 due to lower log production while its oil palm still able to deliver a sustainable result.

As we can see from above, TAANN seems to deliver a lower profit in its timber products segment in fourth quarter of every year. I believe timber harvesting is dependent on seasonal factors and there is an additional cost incurred in fourth quarter of every year.

New Oil Palm JV Projects

On June 2015, TAANN is making a second go at doing joint-venture oil palm development projects with Sarawak state-owned Land Custody and Development Authority, Pelita Holdings Sdn Bhd (“PELITA”) after an aborted earlier attempt.

FYI, TAANN had cancelled its earlier planned projects with PELITA to develop jointly three parcels of land in Mukah and Kota Samarahan totaling about 39,000ha. These agreements, signed on Sept 28, 2012, were revoked due to the land owners’ lack of interest.

However, in June 2015, TAANN had signed two new agreements with PELITA to implement oil palm development projects in partnership with the Sarawak state government and native customary rights (“NCR”) owners.

In the agreement, TAANN would have a 60% stake while PELITA as trustee of NCR owners would have 30% and PELITA itself 10%. (For the year 2012 agreement, the proposed equity interests had been 55%, 30% and 15% respectively.)

This time the JV companies plan to develop the parcels of NCR land situated in Sibu, with aggregate gross area of 17,017ha (of which an estimated 10,210.2ha are plantable area) and NCR land situated in Kapit with aggregate gross area of 11,178ha (of which an estimated 6,706.8ha are plantable).

The joint ventures will enable TAANN to increase its total acreage of oil palm plantations which is in line with its corporate strategy of expanding the size and scale of our oil palm operations

TAANN current total palm age profile above was extracted from its Annual Report 2015.

• Mature (4^th-16^th Years)
• Immature (2^nd-3^rd Years)
• Young (1^st Tear)

In total, TAANN currently had oil palm planted area of 41,141 hectare, with FFB production of 633,143mt.

Its mature planted area consists of 25,657 hectare, with FFB production of 521,473mt. I believe this is the portion which is ready to be extract anytime.

Log Price

The above is the price chart of hard logs, best quality Malaysian Meranti, import price Japan, USD per Cubic Meter.

Basically, hard logs price has not much change and remains flat in year 2015. However, since stepped into year 2016, hard logs price had surged rapidly, from around USD243 per cubic meter to current USD262 per cubic meter, which equivalent to an increase of 7.8%.

As extracted from TAANN annual report 2015, basically its average export log price movement is tied with the previous price chart above which extracted from other website.

In term of palm oil monthly price, palm oil had strongly rebound since it hit the bottom at Aug 2015. Since step into year 2016, it had surged from MYR2,290/mt to current MYR2,550/mt, which equivalent to 11.4%.

TAANN FY16Q1 quarter result (Jan – Mar 2016) is going to release by this month. With the surge of hard log price and palm oil price in the first quarter of 2016, I strongly believe TAANN is able to deliver an excellent result.

Monthly Production

TAANN had 4 types of products from plantation and timber, which are log, fresh fruit bunches, crude palm oil and palm kernel. It updates its monthly production on Bursa on monthly basis.

TAANN log production in year 2015 was trending up and it ended on Nov 2015. This is one of the main reasons why TAANN timber products segment revenue had dropped in last quarter of FY15.

However, it had started to recover since stepped into year 2016.

Basically, TAANN’s FFB and CPO production chart pattern are the same. Both had been trending down since Nov 2015 and started to show some rebound in Mar 2016.

It was probably due several factors, including less conducive weather, longer festive holidays and seasonal factor. Overall, as compared to production in Jan 2015 and Feb 2015, basically there is not much different.

Despite its weak production in last quarter of FY15, TAANN still able to deliver an excellent result from its oil palm segment which contributed from the strengthening of USD against MYR.

USD/MYR Currency Risk

52% of TAANN total revenue is exported to other countries while remaining 48% is from local market.

So, if based on revenue, TAANN will be benefited from weakening of MYR as it received its sales amount from other currency and converted back to MYR later.

As extracted from TAANN annual report 2015 currency sensitivity analysis, for every strengthening of MYR against USD and JPY by 10%, TAANN will have a loss of MYR2.5m.

Even though USD/MYR had weakening since stepped in year 2016, it had shown some rebound in May 2016.

Plywood - Kyushu Earthquake

In Apr 2016, a strong earthquake centered in Kumamoto Prefecture in Kyushu occurred, followed by an even stronger one in the night. The magnitude 7.3 earthquake was the first of several severe quake to devastate parts of Kumamoto Prefecture.

The latest count puts the death toll at 50 with over 13,000 homes being completely destroyed and another 15,000 seriously damaged.

Japan is preparing an extra budget said to be over USD4b for relief and reconstruction in areas affected this month's deadly earthquakes.

Source: Ministry of Finance, Japan

Feb 2016 imports of plywood fell back in Japan after the sharp rise reported in Jan 2016. Year on year Feb plywood imports were down 12% and Feb 2016 imports were down 15% from levels the previous month.

All three of the main suppliers for Japan saw Feb shipments to Japan fall compared to levels in Jan; China (-38%), Malaysia (-20%) and Indonesia (-5%). The top three suppliers accounted for 93% of all Japan’s Feb 2016 plywood imports.

FYI, TAANN plywood export in FY15 was mainly contributed from Japan, which accounted 92%.

In the recent Kyushu earthquake, it will tighten the supply of plywood and TAANN is likely to benefit from it.

Tasmania Veneer Mill

Ta Ann Tasmania (“TAT”) was established in year 2007 and it invested over USD79m to develop two veneer mills - the Huon mill built in year 2007 and the Smithton mill in year 2008 – and in year 2015 commissioned a new plywood manufacturing plant in Smithton.

The new plant will produce premium plywood for the Australian market using veneer that was previously exported from TAT’s Huon and Smithton mills.

As in year 2014, 70% of Australia's plywood is currently imported from other countries, including China.

TMT aims to capture 15% of the Australian market for plywood with products from its new Smithton plant. It will cater the demand for Australia prop boom. It is currently expanding sales of bracing plywood and form ply (TEGO plywood) in the Australian market.

The Chinese demand, both from mainland China and Chinese Australians, is propping up the market and boosting construction in Australia.

Overseas demand for Australian homes remains robust in FY16. The

There is still a huge potential market shares in plywood industry to be grab by TAANN in Australia.

Technical Chart

As at 10^th May, TAANN closed at MYR4.47.

Currently, TAANN is still trading inside the triangle pole and it seems that TAANN still need some time to fill the triangle completely before a breakout.

Its current support level is at MYR4.40.  

Conclusion

• Current price  = MYR4.47
• P/E ratio =9.01
• Dividend = 20 cent
• D/Y = 4.47%
• ROE = 15.73%

Based on its current price, TAANN had a PE of 9.01, which is still considered cheap based on its current earnings. In addition with its current D/Y of 4.22%, TAANN is quite attractive in term of valuation.

Besides, TAANN is a “Sarawak election-theme play” counter too. BN had won 72 seats in Sarawak elections. The score is BN 72 against Opposition 10. Will those Sarawak counters come to a play again?

TAANN is currently develop the parcels of NCR land situated in Sibu, with aggregate gross area of 17,017ha and NCR land situated in Kapit with aggregate gross area of 11,178ha. It is expanding the size and scale of its oil palm operations. However, the result can only be seeing few years later.

I believe TAANN is able to maintain its timber supply for input to its plywood factory and sawmill from the following sources:

Ø Natural logs from the timber licensed areas

Ø Natural and planted logs from its licensed planted forests

Ø Certified veneer from its Tasmania veneer mills

Ø Veneer from its Bintulu veneer mills

n term of plywood, the supply will be tightening in Japan after Kyushu Earthquake. Its new Tasmania veneer mill will also cater the demand of plywood in Australia.

TAANN’s prospects in plantation look bright, with its projected FFB production growing at 15% annually over the next three years, in tandem with rising maturity of its estates.

In long run, TAANN financial performance is expected to be good.

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