Ta Ann’s plantation profit before tax to surpass that of timber this year

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This article first appeared in The Edge Financial Daily, on January 14, 2016.


Ta Ann Holdings Bhd
(Jan 13, RM5.45)
Maintain buy with a higher target price (TP) of RM6.22:
The share price has appreciated by around 18% in the past one month, driven by firm log and crude palm oil (CPO) prices, a weaker ringgit and the anticipation of the Sarawak state elections. We see more upsides as the market improves its appreciation of the undervaluation of the plantation business.

Firm demand for tropical logs and the global log shortage are keeping selling prices high, which together with a stronger US dollar, have benefited timber companies, including Ta Ann Holdings Bhd, and offset the drop in log exports. 

A stronger US dollar will also help partially offset the impact of lower plywood selling prices due to weak demand. Ta Ann’s Tasmanian operation turned profitable in the third quarter ended Sept 30, 2015, after its veneer processing line was upgraded to include a plywood processing line in the first half ended June 30, 2015.

With 95% of its plantable reserves developed and a young average age of 7.5 years, more areas reaching maturity and prime age are expected to contribute to significant growth in fresh fruit bunch (FFB) yields and production. Coupled with firmer CPO prices, we expect plantation profit before tax (PBT) to surpass timber PBT in 2016. New joint ventures to add to depleting plantable reserves are a long-term positive, but there are potential risks in developing native customary rights lands.

We are keeping our financial year ending Dec 31, 2015 (FY15) to FY17 forecasts. Our dividend per share (DPS) forecast of 20 sen for FY15 to FY17 implies an annual yield of 3.7%, which would be one of the highest among the timber and plantation companies.

We are raising our TP for Ta Ann to RM6.22 after pegging the plantation business’ FY16 estimate earnings per share to a higher price-earnings ratio of 15 times to better capture the rising trend of FFB production and plantation PBT. We maintain a “buy” call.

Key downside risks include a major disruption in log and oil palm harvesting; a sharp drop in timber products and CPO average selling prices; unfavourable policies curtailing palm oil exports and demand; and weakness in currencies of key import markets curbing demand.