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This article first appeared in The Edge Financial Daily on February 15, 2019

Ta Ann Holdings Bhd
(Feb 14, RM2.44)
Maintain hold with an unchanged target price of RM2.71:
Ta Ann Holdings Bhd’s veneer mill located in the southern part of Tasmania is now experiencing disrupted operations due to the recent bush fire in the area. The extent of loss is still being assessed but the mill could be out of operations for months. While the mill is fully insured, the consequential loss is not. Pending more clarification, we keep our financial year 2019 (FY19)-FY20 forecast earnings.

 

The bush fire is apparently under control now, but we understand that about 40,000ha out of the 800,000ha forest area that provides logs supply there was lost as a result of the bush fire. Operations at this mill could be out for months. Fortunately, Ta Ann’s another veneer mill (which is similar in capacity) located in the north of Tasmania was not affected. However, it remains to be seen if this northern mill is able to ramp up operations and supply all of Ta Ann’s veneer requirements in Sarawak.

There are earnings risks to Ta Ann’s timber division if the affected veneer mill is not back in operations within the next couple of months and/or the Australian government decides to review the supply agreement following this bush fire and reduces the raw material supply going forward.

There are several risk factors for our earnings estimates, price target, and rating for Ta Ann. Key risks to Ta Ann are: i) weather anomalies resulting in poorer-than-expected oil palm output growth and timber extraction; ii) lower-than-expected crude palm oil, timber, and plywood prices achieved; iii) negative log/plywood export policies by the Sarawak state government; iv) failure to get the remaining forest management unit area certified in 2019; v) negative policies imposed by import countries for palm oil, log, and plywood; vi) sharply lower crude oil price which makes palm biodiesel demand not viable; and vii) weaker competing oil prices (like soybean and rapeseed) for its oil palm division. — Maybank IB Research, Feb 12

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