• Maintain NEUTRAL, new MYR3.60 TP from MYR3.65, 6% downside. We still expect Ta Ann to see better earnings prospects in 2H24, on improved plantation productivity and moderating plantation unit costs. However, its valuation remains fair – the stock is trading at 9.3x FY25F P/E, which is at the high end of its peer range of 6-10x. However, we believe its share price movement will be supported by a handsome c.7% FY24F dividend yield. The plantation unit remains the key driver, accounting for 100% of PBT.

• 2Q24 core earnings missed our and Street expectations, at 38% and 37% of FY24 projections, due to lower-than-expected log output in 2Q24 (-16% QoQ, -41% YoY), which brought its 1H24 log output to -38% YoY (our FY24 forecast: -25% YoY), and higher-than-anticipated plantation unit costs.

• Timber PBT plunged 229% QoQ or 170% YoY in 2Q24 to -MYR5.8m, due to weak numbers from both the log and plywood sub-segments. Log output fell 16% QoQ in 2Q24, bringing 1H24 output to 90k tonnes, as a result of the extreme rainfall in Sarawak. This led sales volume to plunge by 53% YoY in 1H24. Despite the tight supply, its log ASP decreased to USD213/cu m in 1H24 (-20% YoY), amid the continued downturn in the timber markets. That said, it is still maintaining its ASP target of USD260/cu m and output target of 290k tonnes (+6.4% YoY) for FY24, as the weather began normalising in July. We believe this is too bullish, however, as YTD-July output is still weak (-35% YoY) – and have cut our FY24F growth to -36% YoY (from -25% YoY), and that for FY25-26F to +5% YoY pa (from +7% YoY and +9% YoY). We also cut our ASP for FY24F by 8% to USD240/cu m. Ta Ann’s plywood sales volume, meanwhile, rose by 17% YoY in 1H24, from the low base of 1H23 – albeit offset by a weaker ASP of USD502/cu m (-16% YoY) in 1H24, as Japan companies kept their inventory levels low. We maintain our FY24F plywood sales volume at 55k tonnes (-19% YoY) but reduced FY25-26F sales volume growth to -2% YoY in FY25F (from +2%) and +1% YoY in FY26F (from +5%), to reflect the decline in log output, while trimming our ASP by -6% for FY24F.

• Plantation unit’s 2Q24 PBT rose 13% QoQ (+19% YoY) as FFB output increased 18% QoQ (+5% YoY), bringing 1H24 output growth to 2.6% YoY. YTD-July FFB production grew by a still-flattish 2.4% YoY, underperforming against its +5% YoY guidance (management expects production to ramp up in 2H24), but in line with our +3.4% FY24 estimate. We remain cautious and keep our 3-6% growth estimates for FY24-26F. We estimate unit costs increased by 4% YoY in 1H24 due to weaker FFB output vs our original forecast of flattish YoY growth for FY24. As such, we raise our unit cost assumptions by 1-3% for FY24-26F.

• Maintain NEUTRAL with a lower MYR3.60 TP, based on 11x FY25F P/E, after cutting earnings estimates by 14%, 1% and 2% for FY24-26. Ta Ann is trading at a fair 9.3x FY25F P/E, vs its peer range of 6-10x.

Source: RHB Research - 27 Aug 2024