Downgrade to NEUTRAL from Buy, new MYR5.70 TP from MYR6.40, 2% upside with c.7% yield. Lower sales volumes across all divisions resulted in Ta Ann’s 1Q22 earnings coming in below our expectations. With the run-up in its share price over the last 12 months, we believe it is time to take profit. This counter is trading at a fair 7.9x FY23F P/E, in line with its peer range of 6-10x.
1Q22 earnings missed our expectations but was in line with the Street estimate (19% of our and 25% of Street FY22F earnings), mainly due to lower sales volumes across all segments. Management declared a DPS of MYR0.10, bringing 1Q22 net DPS to MYR0.15.
The timber unit remained strong, as its 1Q22 PBT of MYR22.3m (+403% YoY) was mainly contributed by higher log (+13% YoY) and plywood (+39% YoY) prices, offset by lower sales volumes for logs (-14% YoY) and plywood (-2% YoY). Although 1Q22 log production volume (+48% YoY) was slightly above our estimate, sales volumes were lower than expected as TAH seemed to only export 24% of its log output in 1Q22 (vs our projected 40%). We lift FY22F log production by 13%, but reduce our sales volume assumption by 28%, to be in line with 1Q.
In 1Q22, FFB growth dropped 3% YoY, below our assumptions of +8.8% YoY and management’s guidance of +11% for FY22. TAH’s labour shortage was at 30% in 1Q22. TAH has managed to alleviate this shortage somewhat by hiring contract workers, which reduced the shortage to 10% currently. To be conservative, we have revised down our FY22-24F FFB growth to 1-5% (from 1-9%), as well as external FFB purchased projections by 1.2-4.5%.
Higher CPO ASPs achieved, but still below Malaysian Palm Oil Board (MPOB) averages. Despite higher CPO ASPs of MYR5,550 (48% YoY) in 1Q22, this was still lower than MPOB’s MYR6,183/tonne. We understand this was due to lower external FFB supply caused by labour shortages in Sarawak, which resulted in a delay in fulfilment of orders. TAH would then have to fulfil the backlog of orders the following month, at last month’s agreed price. This was detrimental to TAH in a rising CPO price environment, involving 55% of its sales volumes in 1Q22. This may recur in 2Q22, if the labour shortages are not resolved and if CPO prices rise.
We raise our CPO price per tonne assumptions to MYR5,300 (from MYR4,500) for FY22, and to MYR4,300 (from MYR3,600) for FY23, while our FY24F CPO price remains at MYR3,500/tonne. Together with the abovementioned changes, our FY22-24F earnings are revised by -13% to 12.9%.
Cut to NEUTRAL with a lower MYR5.70 TP based on 10x FY23F P/E, after including a 20% ESG discount based on its ESG score of 2.0. We believe TAH is fairly valued. It is trading in line with its peers, although its 2022F dividend yield of c.7% should provide support to its share price.
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