Target RM4.67 (Short Term: Trading Buy)
Ta
Ann's 2Q results, due to be released next Tuesday, may disappoint our
and consensus core earnings as we recently gather that the group has
been paring down some of its high-cost plywood inventories in Tasmania.
This may more than offset the higher log earnings.
We
maintain our EPS pending the release of its 2Q results and could
revisit our FY13 earnings with a downward bias as the inventory sale may
lead to higher-than-expected losses from its plywood operations. Our
SOP-based target price and Trading Buy call are intact. It is not
Outperform because we expect the stock to be re-rated on the back of
rising plywood prices in 2H13.
What Happened
Ta Ann is expected to release its 2QFY13 results on 27 Aug. We gathered that the group pared down its plywood inventories in 2Q, possibly at below-cost prices, which could widen the losses of the division. Its plywood division is currently unprofitable as its raw material cost is inflated by its Tasmanian operations, which have higher operating costs.
What We Think
We still expect the rising log prices to boost its logging profit in 2Q but are now concerned that the wider operating losses from its plywood division, due mainly to unexpected one-off sales of inventories, could offset the better logging earnings. This may result in weaker-thanexpected 2Q core earnings and may lead us to reduce our FY13 earnings as we had not expected the group to sell its inventory at a loss. The only saving grace is that the group could see a one-off gain of around RM20m arising from compensation from the Australian government in 2Q, which will boost its reported earnings. We expect 2H earnings to improve, supported by our view of higher plywood prices and the absence of losses from stock sale while logging earnings will be boosted by higher log production as the weather condition in Sarawak normalises.
What You Should Do
Although 2Q earnings may disappoint, we are likely to maintain Ta Ann as a Trading Buy as we believe its current share price has not reflected the potential of higher plywood prices. Ta Ann also remains our top pick for the timber sector for its high earnings leverage to plywood prices. Re-rating catalysts could come from higher timber earnings in 2H13.
What Happened
Ta Ann is expected to release its 2QFY13 results on 27 Aug. We gathered that the group pared down its plywood inventories in 2Q, possibly at below-cost prices, which could widen the losses of the division. Its plywood division is currently unprofitable as its raw material cost is inflated by its Tasmanian operations, which have higher operating costs.
What We Think
We still expect the rising log prices to boost its logging profit in 2Q but are now concerned that the wider operating losses from its plywood division, due mainly to unexpected one-off sales of inventories, could offset the better logging earnings. This may result in weaker-thanexpected 2Q core earnings and may lead us to reduce our FY13 earnings as we had not expected the group to sell its inventory at a loss. The only saving grace is that the group could see a one-off gain of around RM20m arising from compensation from the Australian government in 2Q, which will boost its reported earnings. We expect 2H earnings to improve, supported by our view of higher plywood prices and the absence of losses from stock sale while logging earnings will be boosted by higher log production as the weather condition in Sarawak normalises.
What You Should Do
Although 2Q earnings may disappoint, we are likely to maintain Ta Ann as a Trading Buy as we believe its current share price has not reflected the potential of higher plywood prices. Ta Ann also remains our top pick for the timber sector for its high earnings leverage to plywood prices. Re-rating catalysts could come from higher timber earnings in 2H13.
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