Target RM4.67 (Short Term: Trading Buy)
Ta
Ann started off as a timber company but has since diversified into oil
palm. While oil palm is currently the largest profit contributor, one
should not overlook the potential of its timber business which could see
stronger earnings as we expect timber prices to head higher.
We
begin coverage on the stock with a Trading Buy call and a target price
of RM4.67, based on an SOP valuation. The stock is not an Outperform as
we expect it to be rerated only in the short term, driven by rising
timber prices. Rerating catalysts could come in the form of stronger
timber earnings in the coming quarters.
Timber profits set to recover
Following six consecutive quarters of weak earnings, it is time to relook at the potential of Ta Ann's timber business as rising log and plywood prices set the tone for a recovery in its timber profits. Our channel checks reveal that Sarawak export log prices have risen by 30-50% since Jan this year. This should benefit the group as it is one of the largest timber producers in Sarawak. It accounted for 6% of Sarawak's log exports in 2012. Additionally, Ta Ann's huge exposure to Japan (39% of its 2012 revenue came from sales of timber products to Japan) makes it a good proxy for the potential upturn in Japan's housing market, which could boost plywood prices. We estimate Ta Ann's timber earnings to recover from a pretax loss of RM18m in 2012 to a profit of RM21m this year. Including the one-off compensation from its Tasmania venture, we estimate that the timber PBT could rise to as much as RM86m, highest since 2007.
Solid palm oil output growth
We are also positive on Ta Ann's oil palm plantation which is projected to churn out strong FFB output growth of 10-18% p.a. in FY13-14, driven by new mature areas and improving yields from its young estates. There is room for expansion as 64% of its land bank is not planted. This could keep the group busy for at least the next 12 years based on its current expansion target of 3k-5k ha annually.
Attractive valuation
Ta Ann has underperformed the market by 29% and its share price has fallen by 19% in the past 12 months due to weak timber and CPO price sentiment. We see this as an opportune time to accumulate the stock as it is trading at a 18% discount to our SOP. We expect the company to report stronger timber earnings in its coming quarterly results in Aug, which could boost sentiment on the stock.
Timber profits set to recover
Following six consecutive quarters of weak earnings, it is time to relook at the potential of Ta Ann's timber business as rising log and plywood prices set the tone for a recovery in its timber profits. Our channel checks reveal that Sarawak export log prices have risen by 30-50% since Jan this year. This should benefit the group as it is one of the largest timber producers in Sarawak. It accounted for 6% of Sarawak's log exports in 2012. Additionally, Ta Ann's huge exposure to Japan (39% of its 2012 revenue came from sales of timber products to Japan) makes it a good proxy for the potential upturn in Japan's housing market, which could boost plywood prices. We estimate Ta Ann's timber earnings to recover from a pretax loss of RM18m in 2012 to a profit of RM21m this year. Including the one-off compensation from its Tasmania venture, we estimate that the timber PBT could rise to as much as RM86m, highest since 2007.
Solid palm oil output growth
We are also positive on Ta Ann's oil palm plantation which is projected to churn out strong FFB output growth of 10-18% p.a. in FY13-14, driven by new mature areas and improving yields from its young estates. There is room for expansion as 64% of its land bank is not planted. This could keep the group busy for at least the next 12 years based on its current expansion target of 3k-5k ha annually.
Attractive valuation
Ta Ann has underperformed the market by 29% and its share price has fallen by 19% in the past 12 months due to weak timber and CPO price sentiment. We see this as an opportune time to accumulate the stock as it is trading at a 18% discount to our SOP. We expect the company to report stronger timber earnings in its coming quarterly results in Aug, which could boost sentiment on the stock.
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