Ta Ann sees its timber business recovering

This article first appeared in The Edge Malaysia Weekly, on December 4, 2017 - December 10, 2017.
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TA Ann Holdings Bhd is expecting its timber business to recover despite a double whammy of lower timber export quota and drastic levy hike for hill logs that has dragged the division into the red.

As both policy changes took effect on July 1, Ta Ann started feeling the effects in its third quarter ended Sept 30 (3QFY2017). The timber division reported a pre-tax loss of RM5.3 million compared with a pre-tax profit of RM26.09 million in the previous corresponding period. Revenue fell from RM152.6 million to RM101.6 million.

To recap, the Sarawak government reduced its timber export quota from 30% to 20% effective July. Before that, in mid-April, it announced a substantial increase in its hill timber premium charge — its first in 31 years — from 80 sen per cu m to RM50.

“The net effect is on the domestic front, affecting the cost of both logs and plywood manufacturing, therefore squeezing the operators’ profit margins,” Ta Ann says in a statement in response to questions from The Edge.

Moving forward, Ta Ann says it hopes to mitigate the impact by passing on the cost via higher prices for both export logs and plywood products, particularly as the quota reduction will restrict the supply of export logs.

The impact of the increase in the hill timber premium charge is magnified for the company’s plywood business due to a 50% recovery rate. In other words, it takes two cubic metres of raw logs to produce one cubic metre of plywood — a net increase of nearly RM100 per cubic metre produced.

Ta Ann typically transfers its non-exportable logs to downstream operations via inter-company sales at market price. About 50% of its log production involves hill logs.

As for its plywood business, the higher cost of raw materials coincided with a lower supply as the timber export quota reduction also means a lower log production quota.

Up to September, Ta Ann’s log output was 195,000 cu m. It was expecting a total output of 350,000 cu m this year. Last year, it produced 446,846 cu m, 19.6% of which came from its forest plantation and the rest from timber concessions.

These factors pulled down log supply to Ta Ann’s plywood mills, affecting utilisation and cost per cubic metre this quarter. To mitigate the higher cost of hill logs, the company is now stepping up log output from its forest plantation, and using Tasmanian veneer to make up for the shortfall.

“We have regularised our position by harvesting more logs from our forest plantation, which doesn’t have any cutting restrictions,” says Ta Ann, referring to the state’s restriction on timber concession logging to trees that are at least 45cm in diameter.

The downstream challenges hit the company’s overall performance in 3QFY2017. It saw quarterly revenue fall 11.9% year on year to RM308.2 million and net profit decrease 55.6% to RM23.1 million as sales of plywood and export logs declined, down 37% and 55% respectively.

In FY2016, plywood made up 34% of Ta Ann’s revenue and 4% of its pre-tax profit while logging operations made up 12% and 35% respectively. The sawmill business contributed 2% to revenue and 1% to pre-tax profit.

The slowing sales offset the improving performance of Ta Ann’s palm oil business, whose pre-tax profit rose 7% year on year to RM54.5 million on a 4.2% growth in revenue to RM205.5 million in 3QFY2017.

Though timber is Ta Ann’s legacy business, it ventured into oil palm soon after its listing in 1999. The latter started contributing to its bottom line in 2006.

In FY2016, the palm oil division marked a milestone by contributing the most — 52.9% — to the group’s turnover for the first time, and accounted for 60% of the pre-tax profit.

Its total land bank stands at 87,151ha, of which 47.8% or 41.64ha are planted. About 88.4% of the planted area is mature, aged between 4 and 17 years.

Last year, the palm oil division produced 666,436 tonnes of fresh fruit bunches (FFB) — up 5% year on year — and saw a top yield of 21.06 tonnes per hectare for oil palm aged between seven and nine years.

Year to date, oil palm has driven the company’s performance in 9MFY2017 with crude palm oil and FFB sales growing 11% and 13% respectively. Average selling prices also increased 14% and 11% respectively, Ta Ann says.

In the nine-month period to Sept 30, the group’s cumulative revenue hit RM880.1 million — up 5% year on year — while net profit rose 11% to RM113.7 million.

Last Thursday, Ta Ann closed at RM3.50 — down 8.9% year to date — giving the company a market capitalisation of RM1.56 billion. Of the nine analysts tracking the counter, three have recommended a “buy” and the rest “hold” while target prices range from RM3.60 to RM4.50.

The highest target price is by MIDF Research, which has a “buy” call on the stock. In a Nov 29 report, the research house says it expects the timber business to improve going forward. “We expect things to normalise in 4QFY2017 and the division should return to a profitable position.”

However, Maybank Investment Bank Research, in a Nov 29 report, says the timber division could see sustained losses in 4QFY2017. It has a “hold” call on the stock and a target price of RM3.86.

Looking ahead, Ta Ann expects stable demand for logs and plywood products in tandem with regional economic growth. It also expects its timber division to ride the Olympics Games in Japan in 2020, which are expected to boost plywood exports and sale prices.

It tells The Edge that its plywood products have been accepted by the Japanese government for infrastructure works ahead of the Games.

“As for export log prices, they went up 5% in the third quarter of 2017 versus the previous quarter. Plywood prices have similarly shown an upward trend,” says Ta Ann. “Given the limited supply base for tropical logs, prices are expected to move upwards steadily with occasional seasonal adjustments.”

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