Plantation taking the lead We believe Ta Ann s plantation division is likely to take the lead in 2016. The rising FFB and CPO production coupled with better CPO prices should provide future earnings growth for Ta Ann. We made no changes to our 2016-18E earnings, but adjust down our EPS by 16.7% to reflect the 1-to-5 bonus issue. We maintain our BUY rating on Ta Ann with an adjusted TP of RM4.42. Cautious log buying from India Ta Ann s total export of logs in 1Q16 fell by 33% yoy to 31,266m 3. This was mainly attributable to the slow demand for logs from India. We believe the Indian buyers are now more cautious on their purchases of logs and the decline in prices is likely to attract them again. Plywood demand still soft Despite the improvement in Japan s housing starts, Ta Ann s plywood export continued to weaken in 1Q16. We believe that plywood exports this year is likely to remain soft mainly attributable to the weakening demand for Malaysian plywood. Also, Japan has recently postponed its plan to increase the consumption tax hike to 2019. Hence, we believe there will not be any rush-in orders for plywood from Japan. Plantation earnings to surpass the timber division In view of the soft timber division, we expect Ta Ann s PBT contribution from the plantation division to surpass that of the timber business this year, accounting for 63% group PBT in 2016E. This is based on expected increase in FFB and CPO production as well as higher CPO ASP. Lowering EPS forecasts to reflect bonus issue We are keeping our FY16-18E earnings forecasts unchanged for Ta Ann, but we cut our EPS forecasts by 16.7% for FY16-18E to adjust for the 1-to- 5 bonus issue. Ta Ann s expected dividend yield remains attractive at 5.3% in 2016E. This would be one of the highest dividend yields among the timber and plantation companies. Maintain BUY on Ta Ann with a new target price of RM4.42 We maintain our BUY rating on Ta Ann with an adjusted SOTP-derived 12-month target price of RM4.42 (after the 1-to-5 bonus issue). We continue to like Ta Ann for its rising plantation earnings given the increasing matured plantation areas, FFB and CPO production, coupled with its attractive dividend yields of 5.3% in 2016E. Earnings & Valuation Summary FYE 31 Dec 2014 2015 2016E 2017E 2018E Revenue (RMm) 1,020.7 1,046.8 1,067.0 1,127.8 1,198.9 EBITDA (RMm) 264.8 314.4 271.8 291.0 316.0 Pretax profit (RMm) 168.5 233.6 190.4 211.5 238.1 Net profit (RMm) 122.5 185.9 138.4 153.7 173.1 EPS (sen) 33.1 50.2 31.1 34.6 38.9 PER (x) 9.6 6.4 10.2 9.2 8.2 Core net profit (RMm) 114.3 169.8 138.4 153.7 173.1 Core EPS (sen) 30.8 45.8 31.1 34.6 38.9 Core EPS growth (%) 14.7 48.6 (32.1) 11.1 12.6 Core PER (x) 10.3 7.0 10.2 9.2 8.2 Net DPS (sen) 20.0 20.0 17.0 17.0 16.0 Dividend Yield (%) 6.3 6.3 5.3 5.3 5.0 EV/EBITDA (x) 5.2 4.2 5.0 4.4 3.7 Chg in EPS (%) -16.7-16.7-16.7 Affin/Consensus (x) 1.1 1.1 1.1 Source: Company, Bloomberg, Affin Hwang forecasts Company Update Ta Ann TAH MK Sector: Timber RM3.19 @ 23 June 2016 BUY (maintain) Upside 38.6% Price Target: RM4.42 Previous Target: RM5.30 Price Performance 1M 3M 12M Absolute -3.6% -24.9% -0.6% Rel to KLCI -3.8% -21.0% 4.8% Stock Data Issued shares (m) 444.6 Mkt cap (RMm)/(US$m) 1,418.4/353.4 Avg daily vol - 6mth (m) 1.2 52-wk range (RM) 2.67-4.79 Est free float 34.7% BV per share (RM) 2.7 P/BV (x) 1.2 Net cash/ (debt) (RMm) (1Q16) (124.4) ROE (2016E) 11.1% Derivatives Nil Shariah Compliant Yes Key Shareholders Mountex 21.1% Wahab Haji Dolah 10.2% Amar Abdul Hamed Sepawi Source: Affin Hwang, Bloomberg 8.1% Nadia Aquidah (603) 2146 7528 nadia.subhan@affinhwang.com Page 1 of 11
Cautious log purchases from Indian buyers Log exports down 33% in 1Q16 Ta Ann s total export of logs in 1Q16 fell by 33% yoy to 31,266m 3. This was mainly attributable to the slow demand for logs from India, and we believe that this has also negatively impacted the other timber companies like Jaya Tiasa and WTK. Notably, Ta Ann s log sales are strongly influenced by India, as about 80% of its log exports is to India (Fig 1). Fig 1: Ta Ann s log export breakdown Source: Ta Ann, Affin Hwang Demand from India remain slow To recap, in late 2015, the high tropical log prices coupled with the depreciation of the INR against the US$ had moved away the Indian buyers from Sarawak, to source lower-cost logs in PNG and the Solomon Islands. We believe the Indian buyers are now more cautious on their log purchases and the decline in prices is likely to attract them to Sarawak again. Ta Ann s log prices declined to US$221/m 3 in 1Q16 from a high of US$289/m 3 in 3Q15. For 2016E, we maintain our assumption for log ASP at US$225/m 3. Fig 2: Ta Ann s log and plywood ASPs Source: Ta Ann, Affin Hwang Page 2 of 11
Ta Ann s 4M16 log production increased by 20% yoy Going forward, we continue to believe that log supply will remain tight due to diminishing natural resources as well as more stringent environment safeguards. Good news is that for 4M16, Ta Ann s log production has improved by 20% yoy to 136,403m 3 (Fig 3). The improvement in log production was partly attributed to: 1) better weather conditions; and 2) the lower base in 2015 due to the clamp down in illegal logging done in Sarawak starting early 2015, that disrupted harvesting process. Also, Sarawak Timber Industry Development Corporation (STIDC) data showed that Sarawak s log production in 3M16 increased by 13.4% yoy to 1,838,189m 3. Fig 3: Ta Ann s monthly log production Fig 4: Ta Ann s yearly log production Source: Bursa Malaysia, Affin Hwang Source: Bursa Malaysia, Affin Hwang Page 3 of 11
Plywood demand from Japan remain soft Japan s housing starts showing signs of recovering Based on the Japanese Ministry of Land, Infrastructure, Transport and Tourism latest data, Japan s housing starts in Apr16 was at 82,389 units, 9% higher yoy and the fourth consecutive month increase over the same period a year ago. Also for 4M16, Japan s total housing starts increased by 6.4% yoy to 298,788 units. The improvement may indicate that the housing starts in Japan are recovering after the slowdown in 2014 due to the consumption tax hike. The strength of Japan s construction and housing market are important as Japan is the largest importer of Ta Ann s plywood (~92% in 2015). Fig 5: Japanese housing starts Source: Bursa Malaysia, Affin Hwang Fig 6: Ta Ann s plywood export breakdown Source: Ta Ann, Affin Hwang however, plywood export down 14% yoy in 1Q16 Despite the improvement in Japan s housing starts, Ta Ann s plywood export continued to weaken in 1Q16, with sales volume declining 14% yoy to 39,215m 3. We believe that plywood exports this year will likely remain soft mainly attributable to the weakening demand for Malaysian plywood partly due to the price competitiveness of Indonesian supplies. Also, Japan has recently postponed its plan to increase the consumption tax hike to 10% from 8% to 2019. So, we believe there will not be any rush-in orders for plywood from Japan. Page 4 of 11
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 24 June 2016 Fig 7: Ta Ann s quarterly total plywood sales volume (m 3 ) 75000 Total plywood sales volume 70000 65000 60000 55000 50000 45000 40000 35000 30000 Source: Ta Ann, Affin Hwang Weaker plywood prices Due to the soft demand for plywood, Ta Ann s blended plywood ASP has declined to US$469/m 3 in 1Q16 from US$499/m 3 in 4Q15 (blended plywood ASP 2015: US$509/m 3 ). However, we believe that the impact on the timber companies earnings would be partially cushioned by the strong US$ against the Ringgit. For 2016E, we maintain our assumption for plywood ASP at US$480/m 3. Page 5 of 11
Taking the lead from timber Maintain CPO price assumption at RM2,400/MT for 2016-18E The CPO 3-M futures have declined to RM2,374/MT on 21 June 2016, from the year s high of RM2,779/MT as at end March-2016. The recent weakness in CPO prices is attributable to weak export demand and potential recovery in yields after El Nino dissipated early this month. We currently forecast a CPO ASP of RM2,400/MT for 2016-18E, 13% higher than Ta Ann s average CPO prices of RM2,132/MT in 2015. Rising FFB and CPO production to boost plantation earnings Ta Ann s earnings contribution from its palm oil division is expected to continue to increase going forward. This would be driven by: 1) increasing maturity of its plantation estates; and 2) rising FFB and CPO production as well as yield. We forecast Ta Ann s matured plantation area of 34,138 ha as at end 2015 to increase to 37k ha-42k ha in 2016E-18E. Also, we anticipate FFB yield to improve to 19-20 MT/ha in 2016E-18E from 18MT/ha in 2015. For 4M16, Ta Ann s FFB and CPO production increased by 7.6% and 11.3% yoy respectively to 170,472 MT and 45,546 MT. Fig 8: Ta Ann s monthly FFB and CPO production Source: Bursa Malaysia, Affin Hwang Fig 9: CPO 3-M futures Source: Bloomberg Page 6 of 11
Plantation contribution to surpass timber In view of the soft demand and prices in the timber division, we are projecting Ta Ann s PBT contribution from the plantation division to surpass that of the timber business this year, accounting for 63% and 68% of group PBT in 2016E and 2017E respectively. This is underpinned by: 1) the expected increase in FFB and CPO production as more areas mature and reach prime status; and 2) the projected higher CPO average selling prices. Fig 10: Ta Ann s forecast assumptions FYE Dec 2014 2015 2016E 2017E 2018E Log production (000 m 3 ) 511.0 432.3 456.7 452.7 451.8 Plywood sales (000 m 3 ) 203.3 181.7 177.6 174.2 173.8 Log ASP (US$/m 3 ) 256.0 270.0 225.0 230.0 230.0 Plywood ASP (US$/m 3 ) 530.0 509.0 480.0 470.0 470.0 FFB production (000 MT) 562.9 630.2 696.9 770.8 858.3 CPO production (000 MT) 152.7 170.8 199.1 225.0 249.7 CPO ASP (RM/MT) 2,246.0 2,132.0 2,400.0 2,400.0 2,400.0 PBT contribution: Timber (RMm) 100.2 144.2 71.1 66.9 68.9 Plantation (RMm) 69.3 89.8 119.3 144.5 169.1 Source: Ta Ann, Affin Hwang estimates Page 7 of 11
Valuation & Recommendation Optimistic on the plantation division We are OVERWEIGHT on the timber sector mainly because of its exposure to the palm oil segment. The rising FFB and CPO production for the timber companies with palm oil division coupled with better CPO prices should provide earnings growth for the timber companies like Ta Ann. Also, we expect the global demand for logs should stay strong on continued tight supply. However, we do not foresee a substantial upswing in logs and plywood prices as we opine that buyers are more rational in their buying behaviour. Lowering EPS forecasts to reflect bonus issue We are keeping our 2016-18E earnings forecasts unchanged for Ta Ann, but we cut our EPS forecasts by 16.7% for 2016-18E to adjust for the 1-to- 5 bonus issue. Ta Ann s expected dividend yield remains attractive at 5.3% in 2016E. This would be one of the highest dividend yields among the timber and plantation companies. Maintain BUY on Ta Ann with a new target price of RM4.42 We maintain our BUY rating on Ta Ann with an adjusted SOTP-derived 12-month target price of RM4.42 (after the 1-to-5 bonus issue). We value Ta Ann based on 10x our 2016E EPS for its timber division, 15x for its plantation division and 1x for BV for its forest plantation. We continue to like Ta Ann for its rising plantation earnings given the increasing matured plantation areas, FFB and CPO production, coupled with its attractive dividend yields of 5.3% in 2016E. Key risks The downside risks to our BUY rating would be: 1) major disruption in log and palm oil harvesting due to extremely bad weather conditions; 2) a sharp drop in ASP for timber products; 3) major losses at its Tasmanian plant; 4) unfavourable policies curtailing palm oil exports; and 6) weakness in currencies of key import markets curbing demand and prices. Page 8 of 11
Focus Charts Fig 11: YTD log production Fig 12: Sarawak s monthly log production Source: Bursa Malaysia, Company Fig 13: Quarterly revenue contribution Source: STIDC, Affin Hwang Fig 14: US$ against the RM Source: Company, Affin Hwang Source: Bloomberg, Affin Hwang Fig 15: Peer comparison Source: Company, Affin Hwang forecasts Note: Pricing as of close on 23 June 2016 Page 9 of 11
Ta Ann FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE Dec 2014 2015 2016E 2017E 2018E FYE Dec 2014 2015 2016E 2017E 2018E Revenue 1020.7 1046.8 1067.0 1127.8 1198.9 Grow th Operating expenses (755.9) (732.4) (795.2) (836.7) (882.8) Revenue (%) 32.6 2.6 1.9 5.7 6.3 EBITDA 264.8 314.4 271.8 291.0 316.0 EBITDA (%) 33.0 (3.1) 8.6 5.2 5.5 Depreciation (90.3) (84.7) (71.7) (69.9) (68.3) Core net profit (%) 14.7 48.6 (18.5) 11.1 12.6 EBIT 174.5 229.7 200.0 221.1 247.8 Net int inc/(exp) (14.2) (12.3) (9.7) (9.7) (9.7) Profitability Associates' contribution - - - - - EBITDA margin (%) 25.9 30.0 25.5 25.8 26.4 Exceptional items 8.1 16.1 - - - PBT margin (%) 16.5 22.3 17.8 18.8 19.9 Pretax profit 168.5 233.6 190.4 211.5 238.1 Net profit margin (%) 12.0 17.8 13.0 13.6 14.4 Tax (44.0) (42.5) (49.7) (55.2) (62.1) Effective tax rate (%) 26.1 18.2 26.1 26.1 26.1 Minority interest (2.0) (5.1) (2.3) (2.5) (2.8) ROA (%) 6.5 9.4 6.6 7.0 7.5 Net profit 122.5 185.9 138.4 153.7 173.1 Core ROE (%) 11.9 16.6 11.1 11.3 11.9 Core net profit 114.3 169.8 138.4 153.7 173.1 ROCE (%) 7.0 10.0 7.5 8.0 8.6 Dividend payout ratio (%) 75.0 45.0 54.0 48.0 42.0 Balance Sheet Statement FYE Dec 2014 2015 2016E 2017E 2018E Liquidity Fixed assets 903.8 920.4 792.5 772.5 754.3 Current ratio (x) 1.9 2.0 3.1 3.4 3.8 Other long term assets 475.8 491.0 491.0 491.0 491.0 Op. cash flow (RMm) 264.8 314.4 271.8 291.0 316.0 Total non-curr assets 1,379.6 1,411.4 1,283.5 1,263.5 1,245.3 Free cashflow (RMm) 145.6 160.4 69.3 166.3 182.9 FCF/share (sen) 0.4 0.4 0.2 0.4 0.4 Cash and equivalents 319.0 323.5 501.5 592.1 699.5 Stocks 120.7 161.4 233.5 243.6 254.9 Asset management Debtors 61.0 75.4 88.4 93.5 99.4 Debtors turnover (days) 30.3 30.3 30.3 30.3 30.3 Other current assets 4.7 1.6 1.6 1.6 1.6 Stock turnover (days) 118.4 118.4 118.4 118.4 118.4 Total current assets 505.4 562.0 825.0 930.8 1,055.3 Creditors turnover (days) 61.4 61.4 61.4 61.4 61.4 Creditors 116.1 129.0 121.0 126.2 132.1 Capital structure Short term borrow ings 126.6 127.9 127.9 127.9 127.9 Net gearing (%) 18.7 11.1 (3.5) (9.8) (16.3) Other current liabilities 17.6 18.7 18.7 18.7 18.7 Interest cover (x) 8.0 10.6 14.7 16.2 18.1 Total current liab 260.4 275.6 267.6 272.8 278.7 Quarterly Profit & Loss Long term borrow ings 389.8 327.3 327.3 327.3 327.3 FYE Dec 1Q15 2Q15 3Q15 4Q15 1Q16 Other long term liabilities 146.6 150.8 150.8 150.8 150.8 Revenue 222.1 256.9 298.9 268.8 218.5 Total long term liab 536.3 478.1 478.1 478.1 478.1 Operating expenses (166.4) (187.6) (184.2) (194.3) (171.4) EBIT 35.9 49.2 92.2 52.4 22.5 Shareholders' Funds 1,088.3 1,219.6 1,362.8 1,443.4 1,543.8 Net int inc/(exp) (3.1) (4.4) (2.8) (2.0) (3.2) Associates' contribution - - - - - Cash Flow Statement Exceptional items 0.9 0.6 1.9 12.8 (1.7) FYE Dec 2014 2015 2016E 2017E 2018E Pretax profit 33.7 45.4 91.3 63.1 17.6 EBIT 174.5 229.7 200.0 221.1 247.8 Tax (8.7) (12.4) (20.9) (0.4) (5.6) Depreciation & amortisation 77.8 84.7 71.7 69.9 68.3 Minority interest 2.1 0.5 (3.0) (4.8) 0.6 Working capital changes 12.9 (33.2) (93.1) (9.9) (11.3) Net profit 27.1 33.4 67.4 58.0 12.5 Cash tax paid (32.3) (43.2) (49.7) (55.2) (62.1) Core net profit 26.2 32.9 65.5 45.2 14.3 Others 7.9 (5.2) (9.7) (9.7) (9.7) Cashflow from operation 240.8 232.8 119.3 216.3 232.9 Margins (%) Capex (95.2) (72.4) (50.0) (50.0) (50.0) EBIT 16.2 19.1 30.9 19.5 10.3 Disposal/(purchases) 2.1 2.3 - - - PBT 15.2 17.7 30.6 23.5 8.1 Others 10.5 20.5 - - - Net profit 12.2 13.0 22.6 21.6 5.7 Cash flow from investing (82.6) (49.7) (50.0) (50.0) (50.0) Debt raised/(repaid) (2.0) (61.2) - - - Equity raised/(repaid) - - - - - Net int inc/(exp) - - - 1.0 2.0 Dividends paid (74.3) (75.5) (74.1) (75.6) (75.6) Others (38.3) (33.0) - - - Cash flow from financing (114.7) (169.7) (74.1) (74.6) (73.6) Free Cash Flow 145.6 160.4 69.3 166.3 182.9 Source: Company data, Affin Hwang estimates Page 10 of 11
20 June 2016 Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12-month period HOLD Total return is expected to be between -5% and +10% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 50450 Kuala Lumpur. www.affinhwang.com Email : affin.research@affinhwang.com Tel : + 603 2143 8668 Fax : + 603 2145 3005 Page 11 of 11