Ta Ann Holdings - Plywood prices recovery soon?

News    It was reported in The Star that Sarawak export plywood prices was expected to rise by 5% to 10% in the next three months or so as the demand from Japan continued to pick up. The current average plywood price is around US$550/m3 compared with US$500/m3 earlier this year.

The report also mentioned that Ta Ann has reduced its plywood production by 30% in 2Q12 because of the weak plywood products average selling price (ASP), which has dropped 15% YoY. Furthermore, Ta Ann was quoted as mentioning that its loss-making plywood operation was under a fine-tuning and cost cutting drive to reduce operating costs.

Comments          The plywood prices recovery is consistent with the pickup in Japan Housing Starts, which has recovered by 13% from 66,928 units in Feb-2012 to 75,421 in July-2012. This could be caused by the continuation of its reconstruction activities from Apr-12 onwards due to the release of new funds from the new Japanese budget year, which starts from April.

Positive on the news as plywood prices recovery will minimize FY12E loss at its plywood division.

Outlook               Despite some positive recovery in plywood prices, we like to highlight that average plywood prices will need to be higher than US$600/m3 for Ta Ann’s division to be profitable. Hence, even if plywood prices maintain current pricing at ~US$550/m3, we expect the plywood division to still be loss-making as the company’s average plywood prices will only be ~US$545/m3.

Forecast               Maintain FY12-13E net profits of RM64m-RM104m, because the small recovery in plywood prices will not have a significant impact at the current juncture. The key earnings driver for Ta Ann is still its plantation division, which commands 76% of the operating profit in FY11. Our estimates are based on CPO price assumptions of RM3150-RM3100 and FFB productions of 457k-672k.

Rating   Maintain UNDERPERFORM

Significantly lower YoY profit from the plantation division and the challenging operating environment for the timber division are expected to cause overall FY12E earnings to tumble by 62%.

Valuation           Maintaining our Target Price of RM3.75 based on an unchanged 13.4x Forward PER on FY13E EPS of 28.1 sen. Our 13.4x Forward PER is based on average 5-year Forward PER, below other planters (which we value at range of 0.5SD-1.0SD). The discount is to reflect challenging operations in timber division.

Risks      A sharp recovery in timber products ASP and CPO prices.

 Source: Kenanga