Ta Ann Holdings Bhd
(July 8, RM2.35)
Maintain buy with an unchanged target price (TP) of RM3.25: Ta Ann Holdings Bhd has been focusing on improving the operation of its 30.4%-owned Sarawak Plantations Bhd’s (SPB) plantation operation as well as its own crude palm oil (CPO) production. Ta Ann’s timber division has seen some signs of recovery in log production volume and demand for timber products has remained healthy, in our view.

 
In 2018, SPB underwent a transformation plan, with a change in management, strengthening of standard operating procedures, upgrading of facilities, intensification of estate enhancement and resource rationalisation. As a result, SPB’s fresh fruit bunch (FFB) production in January to May has increased by 17.9% year-on-year to 98,500 tonnes. We expect SPB to contribute positively to Ta Ann’s earnings. It contributed about 17% of Ta Ann’s net profit in the first quarter ended March 31, 2019 (1QFY19).

Meanwhile, the group has managed to improve its own production and has taken cost-saving measures to keep the palm oil division profitable despite the drop in CPO prices. We believe as more of Ta Ann’s plantation areas reach prime age, improving FFB yield and CPO oil extraction rate (OER), this will contribute to future growth in FFB and CPO production. However, the palm oil division’s performance is dependent on CPO prices, which are expected to be volatile in the current challenging market. We maintain our CPO average selling price assumption at RM2,200 to RM2,500 per tonne for 2019 to 2021.

Separately, Ta Ann’s log production volume has improved after the first phase of the forest sustainability management exercise was completed. Demand for Ta Ann’s timber products has remained healthy, but the change in the type of wood composition being sold has affected log and plywood selling prices.

We make no changes to our 2019 to 2021 estimated core earnings per share (EPS) forecasts for Ta Ann. Maintain our “buy” rating with an unchanged TP of RM3.25. Our sum of parts-derived TP is maintained at RM3.25, based on an unchanged eight times price-earnings ratio on our FY20 EPS estimates for the timber division and a discounted cash flow valuation for the plantation division.

We maintain our “buy” rating as we like Ta Ann for its plantation earnings prospects given the rising mature plantation area, and improving FFB yield and OER. — Affin Hwang Capital, July 8