Ta Ann Holdings - Plantation Profits Take Off in 3QFY23

Date: 
2023-11-29
Firm: 
KENANGA
Stock: 
Price Target: 
3.80
Price Call: 
HOLD
Last Price: 
3.65
Upside/Downside: 
+0.15 (4.11%)

TAANN’s 9MFY23 results beat our forecast but met market expectation. Its 3QFY23 core net profit jumped 87% QoQ driven by higher FFB production and lower cost, while timber earnings stayed subdued. We raise our FY23-24F net profit forecasts by 9% and 5%, respectively, lift our TP by 12% to RM3.80 (from RM3.40) but keep our MARKET PERFORM call.

Its 9MFY23 core net profit beat our expectation at 82% of our full-year forecast but only met market expectations at 76% of the full-year consensus estimate. The variance against our forecast came largely from stronger FFB output and lower costs.

YoY, its 9MFY23 core net profit declined YoY as last year’s CPO prices were unusually high but 3QFY23 core net profit surged sequentially (+87% QoQ, -37% YoY) on better plantation earnings, thanks to seasonally higher FFB output, easier costs and relatively steady QoQ CPO price. Timber performance stayed muted in 3QFY23 on soft log and plywood demand. Net cash rose QoQ from RM223m to RM255m. Having declared dividends of 10.0 sen in 1QFY23 but none in 2QFY23, a 3QFY23 dividend of 15.0 sen was declared, bringing YTD NDPS to 25.0 sen (vs. 40.0 sen for 9MFY22).

Plantation earnings should improve. We are nudging up FY23-24F CNP by 9% and 5%, respectively, on flattish palm oil prices amidst a moderating cost environment. We are keeping our forecast average CPO prices of RM3,800 per MT intact for FY23-24 on tight global edible oil inventory outlook. After three stagnant years, demand in 2023 is recovering, dampening inventory increment to minimal. Meanwhile flattish or tighter end-2024 inventory is now expected on dull supply outlook while demand should continue growing by 3%-4% YoY. With firm CPO prices, lower input costs (fertiliser, fuel but also spare parts), and better margins, earnings should emerge higher over FY24-25.

Soft timber earnings look more likely. Home building and construction activities are expected to stay subdued as the real estate sector adjusts to a higher interest rate environment. Softwood prices have dropped 20%-25% YoY but hardwood prices held up better, at 5- 7% weaker YoY for log and flattish for sawn timber on more tightly regulated supply. Nevertheless, muted timber demand and prices, and hence earnings are still more likely for 4QFY23 and FY24.

Still expecting 25 sen dividends. TAAN has no dividend policy or schedule. In FY22, it announced dividends in Feb (5 sen), May (10 sen), Sept (15 sen) and Nov (10 sen). For FY23, a 10 sen dividend has been declared YTD with a full year NDPS of 25 sen likely for FY23-24.

Forecasts. TAANN cost base is expected to inch up moving forward but we are still raising FY23-24F CNP by 9% and 5% respectively on the stronger-than-expected YTD earnings thus far.

Consequently, we lift our TP by 12% to RM3.80 (from RM3.40) based on 11x FY24F PER, at a 30% discount to the average forward 16x PER for integrated plantation players of 16x PER, and a 5% ESG rating discount given its 2-star rating as appraised by us (see Page 3). Its palm oil operation is MSPO certified (but not RSPO) while Malaysian Timber Certification Scheme and European-based PERF certify its logging operations. TAANN offers defensive net cash balance sheet and dividends yields but earnings growth is muted by weak timber outlook. Maintain MARKET PERFORM.

Risks to our call include: (i) weather impact on edible oil and timber supplies, (ii) unfavourable commodity price fluctuations, and (iii) cost inflation.

Source: Kenanga Research - 29 Nov 2023

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