• Maintain NEUTRAL, new TP of MYR3.70 from MYR5.70, 7% downside. Despite likely strong QoQ earnings growth in 2Q22, we believe valuations are fair – Ta Ann is trading at 7x FY23F P/E, in line with its small cap peer range of 6-9x. In addition, we highlight its large 20% ESG discount accorded for its relatively limited ESG disclosures. However, its decent dividend yield of 8.3% FY22F should provide support to its share price.

• CPO prices have plunged due to the unwinding impact of Indonesia’s export ban, and recession fears which have pulled down commodity prices. We believe the price decline is slightly overdone, having fallen 44% in seven weeks – much more than the declines in soybean, crude oil and wheat prices (-31%, -17% and -16%). Regulatory risks still exist – especially for Indonesian plantations – but we think that supply concerns will continue to haunt the sector for the rest of 2022, given the logistics backlog in Indonesia and the labour shortages in Malaysia. If these issues are resolved by end-2022, and Ukraine is able to export its oilseed products as per the grains deal agreement signed, 2023 should still be a better year for supply, and prices will likely remain under pressure.

• ESG concerns remain, but may have taken a backseat. However, the ESG discounts we had previously assigned to valuations are still prevalent. We reassessed our ESG scores by relooking at the progress made by the industry, identifying shortcomings and any room for improvement. From our analysis, we highlight that while better disclosure on ESG-related information has been made, progress in mitigating ESG issues is rather slow. As a result, we have made some upward revisions to the ESG scores for some companies that have made progress. We also highlight that some planters have remained relatively stagnant in their ESG efforts, while others have even cut down its disclosures.

• Lower CPO price assumptions now. We continue to expect stock levels to remain tight for the next 2-3 months, possibly until end-3Q, which should provide support for CPO prices. We cut our 2022F CPO price to MYR5,100/tonne, from MYR5,300/tonne. For 2023F, as fundamentals continue to improve – assuming labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported, CPO prices could fall to lower levels. However, support from a ramp-up in biodiesel mandates and discretionary biodiesel demand coming back would keep CPO prices above MYR3,000/tonne in the medium term. We lower our 2023 assumption to MYR3,900/tonne (from MYR4,300/tonne). Our MYR3,500/tonne projection for 2024 remains unchanged. As a result, we reduced TAH’s FY22-24F earnings by -19% to +0.6%.

• Maintain NEUTRAL with a TP of MYR3.70 (from MYR5.70) based on 8x FY23F P/E, after including a 20% ESG discount based on its ESG score of 2.0. We believe TAH is fairly valued – the counter is trading at 7x 2023F P/E, in line with its peer range of 6-9x.

Source: RHB Research - 11 Aug 2022