This article first appeared in The Edge Financial Daily, on January 5, 2016.
Ta Ann Holdings Bhd
(Jan 4, RM4.99)
Maintain outperform with a higher target price (TP) of RM6.32: As the US dollar further strengthened from 4.00 in the third quarter ended Sept 30, 2015 (3QFY15) to 4.21 in 4QFY15, timber export revenue is expected to continue to expand. In addition, crude palm oil (CPO) prices have also recovered from the low of RM1,807 per tonne in September to the current level of RM2,200 per tonne, which should also help improve its plantation earnings.
As the group has only 2,000ha of unplanted land bank, coupled with a low net gearing of 0.12 times and strong cash flows in the upcoming years, we opine that management might further increase its current dividend payout of 32% to 48%. Year to date, it has paid out a total of 20 sen or 72% of its earnings.
Wilmar International Ltd, the largest CPO buyer in Sarawak, which made up almost 50% of Sarawak’s CPO production or about 3.3 million tonnes annually for its palm oil refinery in Bintulu, has declared a “no deforestation, no peat, no exploitation” policy effective in 2016. Though 62% or 106,000 tonnes of Ta Ann Holdings Bhd’s FY15 CPO production were sold to Wilmar, management sees minimal impact as the policy will only affect Sarawak planters that have cultivated in forest or peat areas after end-2015.
Currently, about 60% to 70% of its 40,729ha planted area is located on peat soil, and it only has less than 2,000ha of vacant land, which will be planted this year. We think that the worst-case scenario would be price competition for CPO producers, as they will look for the other four refiners, who make up the remaining 50%. Going forward, there will be no change of strategy as the impact on Ta Ann is minimal.
We revised up our TP after adjusting our US dollar/ringgit assumption from RM3.85 to RM4.00 and attaching a higher price-earnings ratio of 13 times (from 11 times) for the timber segment.
Its share price has performed well over the last month, climbing more than 25% since the decent 3QFY15 results. Correspondingly, our earnings forecasts also rose by 8% to 12%. We continue to like Ta Ann for its young age profile, strong fresh fruit bunch production growth and export play for the timber business. — PublicInvest Research, Jan 4