Ta Ann Holdings - Oil palm earnings forecast raised, partly offset by lower plywood prices BUY

- We maintain BUY on Ta Ann Holdings Bhd, with a higher fair value of RM7.86/share (vs. RM7.60/share previously), based on a PE of 13x pegged to a raised FY12F EPS of 60.5 sen (vs. 58.5 sen previously).

- We have tweaked upwards our FY12F-FY13F earnings forecasts by 3% and 6% respectively, pursuant to the raising of our annual average CPO price assumption  to RM3,400/tonne from RM3,300/tonne previously.

- Additionally, this is after factoring in much slower-thanexpected reconstruction activity in Japan, which has affected plywood prices. Log prices could hold up stemming from demand in India, subject to the rupee not weakening further.

- We now expect Ta Ann’s oil palm division to fetch profit after tax of RM154mil (+26% YoY) and RM188mil (+22%YoY) for FY12F and FY13F, respectively.

- We expect FFB production to grow by 24% and 16% annually to 570,000 tonnes and 663,000 tonnes for FY12F and FY13F, respectively. We expect the oil palm division to account for over 80% of earnings for FY12F and FY13F vs. about 77% in FY11.

- While its oil palm division continues to grow strongly, we remain concerned about its wood manufacturing division, particularly its plywood operations.

- Plywood prices have in recent weeks been affected by weak demand from Japan, with the average blended price falling below US$500/cu m in March, vs. US$622/cu m in January and US$566/cu m in February. The average price was at a high of US$621/cu m in FY11. 

- We now forecast an average blended price of about US$530/cu m (US$550/cu m previously) each for FY12F and FY13F – leading to pre-tax losses of RM16mil each annually vs. an estimated RM14mil (including impairment of nearly RM10mil) loss in FY11.

- Nonetheless, we expect the timber division to continue to be supported by the log operations, for which current prices are staying at about US$220/cu m.

- The risks include:- 1) Further delays in the reconstruction of Japan’s tsunami-hit north-eastern region; 2) further weakening of the rupee, and 3) widening losses at its Tasmania veneer manufacturing operations.   

Source: AmeSecurities