This article first appeared in The Edge Financial Daily on November 22, 2019
Ta Ann Holdings Bhd
(Nov 21, RM2.98)
Maintain outperform with an unchanged target price of RM3.27: Ta Ann Holdings Bhd’s cumulative nine months of financial year 2019 ended Sept 30 (9MFY19) core profit of RM35.2 million (year-on-year [y-o-y]: -27.6%) fell below expectations, making up only 60% and 61% of our and the street’s full-year expectations. Nevertheless, riding on the current crude palm oil (CPO) price rally, we believe there will be a strong catch-up in fourth quarter (4Q) earnings. No dividend was declared for 3QFY19. Ta Ann is one of our top picks as we like its: i) young age profile; ii) solid balance sheet; and iii) attractive valuations with an unwarranted forward price-earnings ratio of 9.9 times.
Ta Ann was weighed by softer timber sales (quarter-on-quarter: +24%; y-o-y: -3.1%). Weaker group sales of RM268 million were attributed to a lower contribution from the timber segment (-25.6%) despite stronger plantation sales (+10.3%). Timber sales softened to RM75.9 million as plywood sales were halved to RM40 million despite logging sales doubling to RM31 million. The average 3QFY19 export log price dropped 32.5% y-o-y to US$218 (RM909.06)/cubic metre (cu m) due to the sale of cheaper species and stiffer competition from Papua New Guinea and the Solomon Islands, while the average plywood price softened by 5.5% y-o-y to US$534/cu m. Sales volume of export logs soared 202% y-o-y to 36,883 cu m, while plywood sales tumbled 47% y-o-y to 16,550 cu m, hampered by port congestion issues and softer demand in Japan. The average CPO selling price was down by 5.3% y-o-y to RM1,993/tonne, while fresh fruit bunch (FFB) production climbed 6.3% y-o-y to 247,070 tonnes.
The group’s earnings dipped 23.9% y-o-y to RM23.6 million as a decline in timber earnings was partly offset by stronger earnings from the plantation segment. Logging pre-tax earnings tripled to RM11.5 million, while plywood made a loss of RM6.5 million. On the other hand, plantation earnings rose 7.3% y-o-y to RM42.6 million, driven by a new milling plant. Meanwhile, the earnings contribution from its 30.4%-owned Sarawak Plantation Bhd weakened to RM1.5 million.
Operating cost of the logging segment stood at US$115/cu m, while for plywood it was higher at US$553/cu m (2QFY19: US$540/cu m). CPO production cost was also higher at RM1,850/tonne (2QFY19: RM1,800/tonne) due to a decline in palm kernel credit and higher spending on third-party CPO purchases following the commencement of its third mill. The management has lowered its FFB production growth forecast to 2% from an earlier expectation of 10%. Nevertheless, we think the weaker-than-expected FFB production should be cushioned by a stronger-than-expected CPO price. Based on our sensitivity analysis, for every RM100/tonne increase in the CPO price, it could potentially contribute an additional RM13 million to RM16 million to the group’s bottom line. The new mill in Selangau has been operational since August and it is currently running at its maximum capacity of 45 tonnes/hour. — PublicInvest Research, Nov 21