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Wednesday, May 29, 2019

Ta Ann Holdings - Expecting A Strong Turnaround in Timber

Ta Ann’s 1QFY19 core profit of RM7.2m (+50% YoY) were below our and consensus expectations, making up only 8% and 7.6%, respectively. Despite seeing a strong turnaround in timber business, palm oil segment was affected by a steep decline in CPO prices while FFB production growth was below the expected double-digit level as heavy rainfall in Sarawak during the first two months had severely affected the harvesting activities. Nevertheless, we are keeping our earnings forecasts unchanged as we see a strong catch-up in the subsequent quarters, led by i) a pick-up in FFB production growth, ii) strong recovery in log export volumes and iii) potential certification of Rapit Forest Management Unit in the near-term. No dividend was declared for the quarter. Maintain our Outperform call with an unchanged TP of RM2.98.
  • Driven by stronger timber sales (QoQ: -24.7%, YoY: -17.2%). The weaker group sales of RM178.9m were mainly dragged by a decline in both plantations (-12.9%) and timber (-23.5%) segments. Plantation revenue, which made up of 62% of the group sales, was hit by a decline in CPO selling prices, down 19% YoY to RM1,931/mt despite FFB production climbed 4% YoY to 143,374mt. Meanwhile, timber sales softened by 23.5% YoY to RM66.8m, dragged by weaker plywood sales (-38.7% YoY) despite logging sales nearly doubled to RM18m. Average export log price fell 30% YoY to USD252/cu m, dragged by more log production of cheaper species while average plywood price increased by 8% YoY to USD566/cu m. Sales volume of export logs surged 167% to 15,472 cu m while plywood tumbled 42% YoY to 18,261 cu m likely due to weaker demand from Japan.
  • 1QFY19 core earnings (QoQ: -31.4%, YoY: +50%). The Group’s bottomline surged to RM7.2m, bolstered by a strong turnaround in timber segment which offset a sharp decline in plantation earnings (-56.8% YoY). Both logging and plywood segments returned to the black with estimated profit of RM2.5m and RM3.3m, respectively. On the other hand, plantation earnings halved to RM3.1m, as pre-tax earnings margin fell from 7.3% to 3.6% due to a decline in CPO selling prices and higher production cost. It also recognized a maiden profit of RM1.4m from its 30.4%-owned Sarawak Plantation.
  • Management guidance. For the quarter, operating cost for logging segment stood at USD114/cu m while plywood was at USD505/cu m. CPO operating cost was higher at RM1,650/mt due to weaker Ringgit as well as a decline in PK credit. A new mill in Selangau is expected to be operational soon, which should help to raise its CPO production. The weather in Sarawak has normalized following the heavy rainfall during the Jan-Feb period. We see potential bumper harvest in the 2H, led by a strong pick-up in FFB yield. On the timber segment, both logging and plywood segments are expected to see favourable performance, led by a strong log production this year. We would see a strong export log volume in the 2H upon the certification of second forest management unit, Rapit, in the near-term.
Source: PublicInvest Research - 29 May 2019

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