Stripping out foreign exchange gain of RM2.4m, Ta Ann’s 1QFY23 core earnings were down 49.7% YoY to RM37m. The weak results were below our and consensus forecasts, making up only 14% and 19%, respectively. We cut our FY23-25F earnings forecasts by 22%-23% as we revise down our FFB  production forecast and margin assumption due to lower palm kernel credit  and CPO prices. Maintain Outperform call with a lower SOP-based TP of  RM4.30. A first DPS of 10sen was declared for the quarter.

• Dragged by core segments. The weaker sales of RM350.6m were attributed by a decline in both timber (YoY: -32%) and plantation (YoY: - 27%) sales. 1QFY23 average CPO selling price tumbled from RM5,908/mt  to RM3,890/mt while 1QFY23 FFB production slipped 4.7% YoY to  125,555mt. OER retreated from 19.32% to 19.27%. Timber sales weakened 32% to RM66.5m as sales from plywood softened by 51% YoY,  partially offset by stronger log sales, up 10.7% YoY. 1QFY23 average log  export price rose 5.7% YoY to USD276/cu m while plywood price slipped 3.2% YoY to USD634/cu m. Log export volume rose 13% YoY to 22,750 cu  m and plywood exports volume almost halved to 10,600 cu m.

• 1QFY23 core earnings tumbled 50% YoY to RM37m. The weaker earnings were mainly attributed to both timber (-24%) and plantation (- 58%) segments. 1QFY23 CPO production cost averaged at RM2,460/mt vs  1QFY22’s RM2,455/mt. Timber earnings slipped to RM17m, as plywood earnings tumbled 76% YoY to RM3.1m while logs surged from RM9m to  RM12.7m. Meanwhile, earnings contributions from its 31%-owned Sarawak  Plantation and JV owned refinery company tumbled 71% YoY to RM5m.

• Outlook. Due to the wet weather condition in the 1Q, management sees a  potential downside risk of 5-10% to its FFB production target of 815k mt. It sees steady production cost at RM2,100/mt in 2023. Fertilizer application is  slightly behind the schedule, reaching 20% of full-year target while fertilizer  cost is expected to be softer as NOP cost, which made up 60% of total  fertilizer application, has almost halved to RM2,000/mt. It plans to replant  1,500ha on peat land and another new planting of 1,000ha will be carried  out on JV-owned land with Sarawak state. On the timber segment, it  targets log exports of 100k cu m and plywood sales of 108k cu m. The  Group has recently secured approval from the Sarawak authorities to  renew the licence of all its timber concessions) covering 346,021ha for  another 30 years until 2053. We understand the demand for plywood has  started picking up in May following the Golden week holiday in April.  Meanwhile, management has set CPO price assumption of RM4,100/mt,  USD270/ cu m for log price and plywood price of USD650/ cu m. Lastly, it has allocated capex of RM67m with RM36m for plantation development,  RM7m for reforestation and remaining RM24m for upkeep and  maintenance.

Source: PublicInvest Research - 25 May 2023