TAANN's 9MFY24 results beat Kenanga's but met market expectation. After a poor 1H, 3QFY24 saw seasonally stronger plantation earnings as well as lower timber losses. Plantation earnings should continue to stay robust in 4QFY24 and extending into FY25 along with better timber outlook albeit slightly. We are adjusting up FY24F and FYF25F core EPS by 16% and 5%, respectively, as well as our TP by 11% to RM4.00 but keeping our MARKET PERFORM call intact.

9MFY24 core net profit surpassed our forecast. Excluding fair value gain of RM41m and RM0.3m of net disposal gain, 9MFY24 core net profit of RM125m (-4% YoY) accounted for 77% of Kenanga and 67% of consensus full-year estimates. Firm CPO prices amidst better seasonal FFB harvest and lower cost lifted plantation and group earnings as timber division stayed loss-making on weaker YTD sales and selling prices for both logs and plywood.

Strong 3Q plantation earnings. 3Q plantation earnings strengthened on seasonally higher FFB harvest of 0.216m MT (+45% QoQ, +3% YoY) and firm CPO price of around RM4,000 per MT (flat QoQ, +8% YoY). Margins also improved as fertiliser and fuel costs stayed subdued. However, the timber unit continued to report RM3.5m pre-tax loss in 3Q albeit lower than 2Q pre-tax loss of RM5.8m as log sales and prices inched up QoQ but remained weak YoY.

Full-year FY24 earnings to clip last year's. Contrary to our earlier expectation, plantation earnings are now expected to improve sufficiently YoY to overcome timber losses and lift FY24 earnings to surpass last year's. We are nudging up FY24 CPO price from RM4,000 to RM4,100 per MT but keeping RM4,000 intact for FY25. Overall global edible oil supply moderated to provide support for edible oil prices, including palm oil prices which are at relatively firm levels.

Meanwhile, cost is likely to stay subdued on lower fertiliser and fuel costs in 4Q while better PK prices should cushion higher minimum wages in FY25. Timber looks to stay challenging in 4Q with modest recovery in FY25. Overall, better plantation earnings are set to cover dull timber performances in 4Q and FY25.

Timber performance to stay muted. A firmer MYR and weak Japanese demand for plywood are expected to dampen recovering log sales to India and Taiwan. Overall, 4Q timber losses are expected to narrow to break even in FY25 as 3Q Malaysian hardwood timber prices have starting improving by 3%-5% QoQ, potentially indicating that a bottom is near.

Forecasts. We are raising FY24-25F core net profit by 16-5% on FY24 CPO price upgrade and narrower timber losses in 4Q and FY25.

Valuations. Our TP is also upgraded by 11%, from RM3.60 to RM4.00 based on 1.0x PBV, the average for smaller plantation companies' PBV range of 0.9x-1.1x. The 10% risk premium is removed to account for possible narrowing timber losses rather than widening. However, a 5% ESG discount for its 2-star rating as appraised by us (see Page 3) remains. TAANN's plantations are MSPO certified but not RSPO.

However, its timber unit is under Malaysian Timber Certification Scheme and European-based PEFC. 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 - 26 Nov 2024