KUALA LUMPUR (May 3): RHB Research has downgraded TA Ann Holdings Bhd to "neutral" from "buy", with a reduced target price of RM4.00 from RM4.15, after the stock increased by over 35% in the past year, leading the research firm to believe that the valuation is now fair.
“We believe valuation is now at a fair level, trading at eight times, within the mid-range of its peers’ seven to 10 times and its five-year average of eight times,” said the research firm in a note on Friday.
RHB Research also cut its financial year 2024 (FY2024) earnings forecast for Ta Ann by 4%, keeping its assumptions for FY2025-FY2026 given lower logs and fresh fruit bunch (FFB) production growth, and higher crude palm oil (CPO) costs.
The firm expects higher average selling prices (ASPs) coming from the plantation and logs segments to be offset by lower-than-expected sales volume for plywood, flattish FFB, as well as slightly higher CPO unit costs.
It noted that Ta Ann’s log production volume in the first quarter of 2024 (1Q2024) was at 49,000 cubic metres (cu m) — down 17% quarter-on-quarter (q-o-q) and 35% year-on-year (y-o-y) — constituting 17% of its target, due to wet weather.
“Despite the sharp decline, management is still hopeful for output to ramp up in 2H2024 (second half of 2024), maintaining its target of 290,000 (+6.4% y-o-y).
“We believe its forecasts may be too optimistic and therefore cut our log output growth to -6% from +3% for FY2024, and +7%-10% in FY2025-2026F versus +9%-14% previously. Given the tight supply, this could provide upward pressure to the export logs prices as seen by the 16% q-o-q rise in ASP in 1Q2024 to US$220 (RM1,046)/cu m versus US$190/cu m in 4Q2023,” it said.
RHB Research raised its FY2024 ASP by 5% to US$260/cu m, while maintaining its price assumptions for FY2025-FY2026.
“Plywood remains tough. The segment was in the red in FY2023, due to RM10 million write-off for the veneer inventory in Tasmania — driven by declining demand from Japan and a sharp escalation of freight charges,” it added.
The research firm said that as Japan runs down stocks, Ta Ann’s management expects demand to start picking up in 2H2024 as restocking activities resume.
RHB Research trimmed its FY2024 output volume to reflect a 3% decline from a 10% growth, coming from lower logs production.
“We expect (logs) ASPs to remain flattish at US$550-565/cu m in FY2024-FY2026F, in line with management guidance at US$550/cu m, with 1Q2024 prices of US$530/cu m (-15% q-o-q).”
All in all, despite the current headwinds, RHB Research expects the timber division to remain in the black in FY2024-FY2026.
Consequently, Ta Ann has revised its FY2024 FFB production growth target to 5% from 10%-12% but expects production to rebound significantly in 2H2024 with drier seasons and better fertiliser application in FY2023.
“Hence, we cut our FY2024 FFB growth expectations to a more conservative 3% while keeping our FFB growth assumptions of 5%-6% for FY2025-FY2026F.
“We also marginally increase our CPO unit cost to RM2,670/tonne from RM2,600/tonne to reflect more aggressive manuring activities in FY2024F, above Ta Ann’s guidance of RM2,400/tonne,” it added.