The Edge Markets (09/12/2019) - Ta Ann Holdings Bhd

(Dec 6, RM3.20)
Maintain buy with a higher target price (TP) of RM3.60: After revising forecasts post-stock coverage reallocation, we cut our financial years 2019 to 2020 (FY19F-20F) earnings forecast by 21.8% to 12.6%. Ta Ann Holdings Bhd’s export log volume has recovered following an almost-completed forest certification process, and we expect the timber segment to record earnings growth. Riding on the current crude palm oil (CPO) price rally, earnings growth should be further compounded by the plantation segment, contributing 83% of earnings in FY20F (versus 76% in FY19F).

The plantation segment will still be the dominant net profit driver. Fresh fruit bunch (FFB) production for the nine months of financial year 2019 (9MFY19) increased 4.7% year-on-year (y-o-y). For FY20, we expect FFB production growth of 8.3% y-o-y (management’s guidance: 12% y-o-y), as the impact of dry weather back in the third quarter of financial year 2019 (3QFY19) and Ta Ann’s lower fertiliser application in FY19 should affect its output in FY20. Ta Ann is estimated to post higher CPO production in FY20, on the recent commencement of operations of its third palm oil mill, bringing total capacity to 255 tonnes an hour. Our CPO price assumptions are RM2,400 for FY20 and RM2,500 for FY21.

Log division earnings driven by higher exports upon the forest certification. The upward revision of export log quota has contributed significantly to log sales volume, Ta Ann’s log exports rose 180% y-o-y in 9MFY19. A total of 213,749ha of the company’s natural forest areas have been certified as at end-September, with another 132,194ha expected to be fully certified by 1QFY20. Upon completion of the certification, Ta Ann will be able to continuously export 40% of its log output for all its concessions — which will widen margins more sustainably.

The plywood division is expected to remain in the red for FY19F due to changes in sales composition of its plywood products, where more lower end-products have been sold. However, we expect this division to break even going into FY20F, as the group modifies offerings to be more in line with its buyers’ demand. In addition, we could see additional demand coming from Japan’s post-typhoon reconstruction activities in the first half of FY20F.

We maintain “buy” with a higher sum-of-parts-based TP of RM3.60, from RM2.40, 16% upside. We now apply a target FY20F price-earnings ratio (PER) of 12 times for its timber segment, from 0.5 times price-to-book value previously, as we anticipate greater earnings visibility from the timber segment. For its plantation segment, we ascribed a higher target rolled-forward FY20F PER of 18 times (from 16 times) in line with the higher PERs of mid-cap plantation companies which began rallying on the back of the CPO price uptrend recently. Our revised TP implies a FY20F PER of 16.9 times, at one standard deviation above its five-year and 10-year historical average PERs. — RHB Research Institute, Dec 6