This article first appeared in The Edge Financial Daily on January 18, 2018

Ta Ann Holdings Bhd
(Jan 17, RM3.46)
Maintain outperform with an unchanged target price of RM4.14: We attended Ta Ann Holdings Bhd’s analyst briefing on Tuesday and was furnished with more details about the recent proposed acquisition of a 30.3% stake in Sarawak Plantation Bhd (SPB). Management explained the rationale of acquiring the stake as in line with management’s long-term target of achieving 100,000ha land bank. Although SPB’s fresh fruit bunch (FFB) yield is unattractive, management believes it is able to bring in the required technical expertise to help propel productivity. 

Although we reckon that the proposed acquisition is fairly priced, there are few key issues that Ta Ann needs to look into. Firstly, it is the low FFB yield of 12.38 tonnes per ha, which is significantly lower than Ta Ann’s 18 tonnes per ha and SPB’s average of 16.13 tonnes per ha. Secondly, out of 34,837ha planted area under SPB, 23.2% or 8,083ha fall under the encumbered area or disputed area, which could conflict with native customary rights. Ta Ann’s management will start initiating talks with the locals upon the completion of the proposed acquisition. It is confident of seeking a 30% recovery every year from 2018, based on its experience in dealing with the locals on the logging site. If the recovery plan is successful, it could contribute a 7% to 22% increase in FFB production to SPB over the next five years.

About 34,000ha of SPB’s land is on mineral soil, while the remaining 10,000ha is on peat soil. Ta Ann’s management plans to share its expertise knowledge in the water control system and planting terrain, given that Ta Ann’s strength lies in the peat soil planting area. It will also bring in new machineries to improve the productivity of mineral land plantation. Should these plans be implemented successfully, it is projected to see a normalised FFB production yield within the next two years and may be on a par with Ta Ann’s own FFB yield by 2020. 

The proposed stake acquisition will require shareholders’ approval, which is scheduled to be held in March. It is believed the company may consider the possibility of strengthening its stake in SPB if it sees potential opportunities arise in the future. Ultimately, Ta Ann is aiming for a controlling stake in the targeted company. 

Despite a low gearing level and sitting on a cash pile of RM283 million, Ta Ann plans to fund the RM169 million stake acquisition, mainly via bank borrowings, while the remaining RM39 million will be funded by its own cash. 

Ta Ann’s FFB production is expected to see a decent growth of 10% to 18% for the next two years, banking on the young age profile. For the timber segment, log production volume is expected to rise from this year, driven by an increased contribution from plantation logs, while natural log production will improve by 10%. — PublicInvest Research, Jan 17