Lower CPO prices likely to offset Ta Ann earnings

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Ta Ann Holdings Bhd
(Nov 10, RM3.80)
Maintain “neutral” with a target price (TP ) of RM3.80:
Ta Ann Holdings’ analyst briefing hosted by its chief executive officer Datuk Wong Kuo Hea was informative, touching on the new timber licensing policy in Sarawak, its strategy to address its loss-making venture in Tasmania, Australia as well as its plans to expand its palm oil land bank.

We make no changes to our forecasts and maintain our sum-of-parts (SoP)-based TP of RM3.80, as we believe lower crude palm oil (CPO) prices will likely offset stronger timber earnings.

As a result of the Sarawak government’s new timber licensing policy, Ta Ann is proposing to amalgamate its four timber licences to form a new forest management unit (FMU), which will have a tenure of 60 years (from five to 15 years currently).

Timber companies would then have to get their FMUs re-certified under the Malaysian Timber Certification Scheme and certified by the Forest Stewardship Council in New Zealand, which would alleviate pressures from non-governmental organisations.

Ta Ann does not expect any changes to its logging quota from this new ruling. We are positive, given the longer licence tenure and the more environmentally-friendly policies.

Ta Ann’s converted 48,000 cu m per year plywood (from veneer) mill in Tasmania is nearing completion and will commence operations in early 2015.

As a condition of the agreement reached between Ta Ann and the Tasmanian government in 2013, Ta Ann is required to keep its operations running for the next five years.

With the new plywood mill, Ta Ann will save on transport costs and sell its plywood domestically (as Australia currently imports 35,000 cu m of tropical plywood per month).

We understand that margins are about 10% to 15% for this product. We are not imputing any contributions from this plant into our forecast yet, although we estimate this could add 8% to 12% to our forecasts, assuming a 100% take-up.

Ta Ann will finish planting up all its plantable palm oil land by 2015 and is looking to expand its land bank, preferably in Sarawak.

Maintain “neutral”. While we are positive on the latest developments and continue to like Ta Ann’s strong fresh fruit bunch (FFB) production growth of 10% to 20% per annum over the next few years, this would not be enough to offset the impact of lower CPO prices, given its sensitivity to CPO price movements, where every RM100 per tonne could impact earnings by 7% to 9%. — RHB Research Institute, Nov 10

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This article first appeared in The Edge Financial Daily, on November 11, 2014.