Ta Ann Holdings - JV to expand oil palm land bank

News   Ta Ann has entered into three JV agreements with Pelita Holdings Sdn Bhd (PHSB) to implement oil palm development projects on three parcels of land in Mukah and Kota Samarahan, Sarawak. The land will be developed in partnership with the registered land owners or beneficial owners of the lands (“RLOOBOOL”). Total gross area of the plantation land is 39,020 ha (23,412 ha of it plantable) – see Page 2 for details.

 Ta Ann will hold a 55% stake in the JV with the remaining 45% held by PHSB (15% as a direct owner, 30% as a trustee).

 The justification given to enter into the JV is to  further increase Ta Ann’s total acreage of oil palm plantations, in line with the group’s aim of continually expanding its oil palm division to achieve greater economies of scale and to broaden its earnings base.

 Note that Ta Ann does not need to commit any capital or investment outlay at this stage. The amount of capital and investment outlay will be incurred on a staggered basis depending on the progress of participation by the project’s participants. However, the eventual total capital for the JV will be RM117m.

  

Comments   We are positive on the deal as Ta Ann’s total plantation land will increase by 35% to 90,093 ha. The group’s focus on expanding its plantation division should eventually boost the EBIT contribution from the plantation division to exceed 90% in the future (from 76% in FY11).

 Based on eventual total capital of RM117m, valuation of the land at RM5000 per ha each seems fair. Although this is lower than the valuation of RM35,000-RM40,000 per ha for other lands in Sarawak, Ta Ann has other obligations to RLOOBOOL – see Page 2 for more details. 

 Meanwhile, Ta Ann's timber division is still facing a difficult time. For FY12E, we expect its plywood average selling price (“ASP”) at only US$520 per m3 , which will be below the production cost of US$600 per cubic metre. Hence, the plywood division is likely to register a loss for this financial year.

  

Outlook  In the near term, the negative outlook for the timber division should outweigh the good prospect from the plantation division in the next six to 12 months.

  

Forecast  We maintain our FY12-13E earnings of RM64mRM104m. Any earnings impact from the JV above will only kick in by FY16E as oil palm trees need at least 3 years before they start producing FFB.

  

Rating Maintain UNDERPERFORM

 Our Target Price of RM3.75 suggests that there is still downside of ~4% to the share price.

  

Valuation   Maintain our Target Price of RM3.75 based on an unchanged 13.4 times forward PER on FY13E EPS of 28.1 sen.

  

Risks  Better than expected timber product and CPO prices.

Source: Kenanga