Ta Ann Holdings - Weak Timber Earnings Weigh

Date: 
2024-05-28
Firm: 
KENANGA
Stock: 
Price Target: 
4.00
Price Call: 
HOLD
Last Price: 
3.92
Upside/Downside: 
+0.08 (2.04%)

TAANN’s 1QFY24 results met our forecast but disappointed the market. Its 1QFY24 core net profit eased 9% YoY as improved plantations profits were more than offset by weaker timber earnings. Lower cost at its plantation operation will continue to drive earnings. We maintain our forecasts, TP of RM4.00 and MARKET PERFORM call.

Its 1QFY24 core net profit of RM35m (excluding RM8.4m fair value gain and RM0.2m net disposal loss and impairment) came in at 19% and 17% of our full-year forecast and the full-year consensus estimate, respectively. We consider the results within our forecast (given the seasonally low 1Q, harvesting only 19% and 23% of its annual FFB and timber production, respectively) but disappointed the market. It declared a NDPS of 15 sen, on track to meet our full-year of forecast of 25 sen.

YoY, its 1QFY24 top line was flattish on similarly flattish average CPO selling price realised of around RM3,900 per MT as FFB production dropped and timber turnover declined. However, its core net profit slipped 9% as improved plantations profits (on lower cost) were more than offset by weaker timber earnings.

QoQ, its 1QFY24 core net profit dipped 19% as FFB and log harvest fell 35% and 17%, respectively, offsetting the stronger CPO prices. Its timber earnings were weaker on softer demand while FFB production declined from a high base in 4Q, which is typically the second best quarter in terms of plantation harvest.

Outlook. We expect flattish CPO prices in CY24 as global edible oil inventory is expected to decline though staying manageable. Worldwide, edible oil supply is expected to struggle in keeping pace with trendline YoY growth of 3%-4% in edible oil demand in CY24 and possibly up to mid-CY25. As such, we are keeping our forecast average CPO prices of RM3,800 per MT for FY24-25 intact. However, the cost of producing CPO is expected to moderate. Fertiliser prices are now 30% lower YoY while energy cost is 10% weaker. After declining since mid-CY22, palm kernel (PK) prices have started rising in April 2024 and as CPO mills sell PK as a byproduct, better PK prices translate to lower CPO cost.

Soft timber demand still likely. Home building and construction activities are expected to stay subdued in view of economic headwinds and higher borrowing costs. Prices of hardwood log have continued to slide but hardwood sawn timber prices are gradually inching up. However, overall hardwood timber demand is expected to remain muted for FY24-25 hence timber earnings are likely to remain soft.

Forecasts. Maintained.

Valuations. We also maintain our TP of RM4.00 based on 1.0x PBV, the average for smaller plantation companies’ PBV range of 0.9x-1.1x, with a 5% ESG discount for its 2-star rating as appraised by us (see Page 3). TAANN’s plantations are MSPO certified but not RSPO while its timber unit is under Malaysian Timber Certification Scheme and European-based PERF. Maintain MARKET PERFORM.

Risks to our call include: (i) weather impact on CPO and timber production, (ii) unfavourable commodity price fluctuations, and (iii) cost inflation.

Source: Kenanga Research - 28 May 2024

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