1HFY22 core net profit (CNP) of RM187m (+101% YoY) is in line with our expectation but came 25% below consensus, accounting for 71% of our, and 53% of consensus’, FY22 forecasts. Log exports improved and prices for both palm oil and log were healthy. However, softer CPO price is in sight. We are keeping our FY22F/FY23F earnings but trimming TP from RM6.00 to 5.50 as FY23F CEPS is adopted as valuation base. However, valuations are very attractive, prompting an upgrade from MARKET PERFORM to an OUTPERFORM.

1HFY22 earnings improved as both plantation and timber operations saw better performances in 2QFY22. Plantation PBT improved in the second quarter to RM128m on higher CPO price of RM6,500/MT (+17% QoQ, +57% YoY), which pushed average CPO price to approximately RM6,050/MT (+53% YoY) for 1HFY22. FFB production soared 22% QoQ in 2QFY22 to 162K MT, offsetting an otherwise weak first quarter to lift 1HFY22 output to levels comparable to a year ago. Thanks to stronger demand following Russia log export ban, timber earnings also rose in 2QFY22 as log prices continued inching up. As processed or manufactured wood products require logs as raw material input, the Russian export ban also caused plywood supply tightness pushing prices up in 2QFY22, especially on YoY basis. YoY, log production also jumped 39% to 170K m3 in 1HFY22.

Another 15.0 sen of dividend was declared. Note that TAANN announced a first 5.0 sen interim dividend in February followed by a second interim of 10.0 sen in May. Adding this latest 15.0 sen dividend raised the accumulated NDPS for 1HFY22 to 30.0 sen. Therefore, we are revising up our FY22F NDPS from 30.0 sen to 50.0 sen and, for FY23F, from 30.0 sen to 40.0 sen. The group’s net cash has risen further QoQ, from RM55m at the end of March 2022 to end 1HFY22 at RM144m, versus RM130m of net debt a year ago.

Demand outlook for logs and plywood is likely to stay buoyant despite prospects of slower economic outlook due largely to Russia – a major log producer – banning exports from Jan 2022 onwards (i.e. before the Ukraine conflict started). This has not only tightened international log supply but downstream timber products as well since sawmills and plywood producers compete for diminished raw logs supply. As TAANN exports plywood to Japan, the Group has been enjoying better offtake and prices for its plywood. TAANN also exports logs which prices and volume are also quite steady. Overall, FY22F/FY23F timber earnings are expected to stay healthy.

Seasonally high production months are approaching for palm oil (and soya) and CPO prices are currently consolidating from a peak in April 2022 but we believe the price downside will be limited on: (i) still tight international edible oils and fats supply, (ii) more pronounced demand recovery in 2023, and (iii) elevated energy prices fueling demand for biofuel.

Although we are optimistic of the timber division, it is the plantation division that contributes the bulk of the Group’s earnings and CPO prices for TAANN should average RM4,500/MT for FY22F and RM4,000/MT for FY23F. We are toning down our TP for TAANN from RM6.00 to RM5.50 based on target 10x PER against FY23F CEPS (instead of FY22F previously) and a 5% discount for the group’s low ESG rating. We are in the midst of reviewing TAANN score for ESG but current score of 2-star remains.

However, we are upgrading our recommendation from MARKET PERFORM to OUTPERFORM as its present ratings are attractive despite the trimmed TP. Moreover, the group has turned net cash and FY22F NDPS has been raised from 30.0 sen to 50.0 sen, promising a dividend yield of 9% at TP of RM5.50.

Source: Kenanga Research - 30 Aug 2022