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Monday, January 23, 2017

TaAnn - Mixed Fortune

Author: PublicInvest   |   Publish date: Mon, 23 Jan 2017, 09:47 AM 

Ta Ann’s share price had a good run over the last 2 months, rallying more than 10%. In our view, the rally was fuelled by i) solid balance sheet, ii) US dollar strength, iii) continuous uptrend in CPO prices and iv) decent dividend yield. For FY17, plantation will continue to be the key earnings growth driver for the group while timber business will remain lacklustre. We continue to rate Ta Ann with an Outperform call and unchanged TP of RM4.42.
  • FY16 earnings forecast achievable. For the first 9 months of FY16, it made up 70% of our full-year earnings. We believe that our earnings forecasts are achievable given the i) stronger US dollar movement (QoQ: +8.4%), closing at 4.4862) and ii) a jump in CPO prices (YoY: +36.5%, QoQ: +12%), averaging at RM2,948/mt. However, timber segment is expected to experience margin squeeze due to softer timber prices. 4Q FFB production is expected to be affected by the lagged effect of El Nino and likely to post softer production data compared to the prior year.
  • Capex guidance for FY17. Management has allocated RM90m capex for this year with RM60m for existing immature areas and new areas under the Native Customary Rights (NCR) joint-venture partnership as well as new mechanization for fruit collection and evacuation due to shortage of foreign labour, RM20m for plywood and logging plant upgrades and the remainder will be used for new tree plantings.
  • FY17 FFB is expected to grow. Management is looking at FFB production growth of 10%-13% based on the estimated mature area of 37,000ha and FFB yield of 20mt/ha. However, the persistent El Nino’s effect could pose a threat to the FFB production target, which could potentially see the production target dragged by 3-4%.
  • CPO price performance will be the key influence to our FY17 earnings forecast. Our sensitivity analysis shows that for every RM100 increase in CPO price, it will enhance the group’s earnings by about 5%. Assuming that FY17 average CPO price exceeds our CPO price assumption of RM2,600/mt, Ta Ann is likely to deliver better-than expected results this year. For the 1HFY17, timber segment is expected to remain soft while plantation segment should deliver strong earnings growth, bolstered by CPO price rally and production growth.
  • Targeting to maintain cost of production. Management targets to see a steady cost of production for its timber and plantation arms this year. It is looking at FFB cost of RM280-300/mt despite higher fertilizer cost weighed in due to weaker ringgit, which will be cushioned by improved FFB production. For timber, log cost is expected to stay around USD120 cum while plywood cost will range around USD430-440 cum.
Source: PublicInvest Research - 23 Jan 2017

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