Ta Ann Holdings Bhd
(July 22, RM2.32)
Maintain buy with an unchanged target price (TP) of RM2.65: We had a rare opportunity to visit one of Ta Ann Holdings Bhd’s timber concession area in Kapit, a certified forest management unit (FMU).

We also visited one of Sarawak Plantation Bhd’s estate in Mukah.

Once an underperformer, we believe Sarawak Plantation is on track to turn around.

The Kapit FMU is one of Ta Ann’s four FMUs in Sarawak, which meets the requirements of the state legality system and undertakes the forest management certification endorsed by the Programme for the Endorsement of Forest Certification.

This is a commitment towards long-term forest management and sustainability, as well as environmentally friendly harvesting, on top of securing a 60-year licence tenure and 40% export log quota (otherwise 20%).

We were able to learn and observe the harvesting operations on the ground.

Recall that Ta Ann acquired a 30%-associate stake in Sarawak Plantation in January 2018, where previously Sarawak Plantation was an underperforming oil palm company with estates yielding only 9.2 to 13 tonnes per hectare of fresh fruit bunches (FFB) between 2011 and 2016.

In just over a year, we are seeing an improvement in FFB production with the help of Ta Ann’s operational experience and expertise from the top management. For the first five months of 2019, FFB production grew 18% year-on-year.

A challenge for the timber industry in Sarawak is that it is constantly under the scrutiny of environmental non-government organisations.

However, having seen the operations on the ground, it gave us comfort that Ta Ann adheres to international certification standards and practise sustainable log harvesting operations.

There are several risk factors for our earnings estimates, TP and rating for Ta Ann.

Key risks to Ta Ann include: i) Weather anomalies resulting in poorer-than-expected oil palm output growth and timber extraction; ii) lower-than-expected crude palm oil, timber and plywood prices achieved; iii) negative log/plywood export policies by the Sarawak state government; iv) failure to get the remaining FMU area certified by end-2022; v) negative policies imposed by the countries importing palm oil, logs and plywood; vi) sharply lower crude oil prices which make palm biodiesel demand not viable; and vii) weaker competing oil prices (like soybean and rapeseed) for its oil palm division. — Maybank IB Research, July 22