Maybank IB Initiating Coverage 5 April 2012
Brief Overview
A planter at heart. Traditionally a major timber player in Malaysia, Ta Ann has in recent years diversified and fortified its business model. Today, it has stronger earnings quality emanating from three core businesse s, with its palm oil division being its key earnings driver:
(i) Upstream palm oil business – A total land bank of ~65,000 ha in Sarawak with 30,911 ha planted (as of Dec 2011) and another ~12,000 ha of plantable reserves.
(ii) Timber – Logging concession (435,256 ha of concession area in Sarawak) with ~400,000 m3 of logs and ~210,000 m3 of plywood produced in 2011.
(iii) Forest plantation – 313,087 ha of licensed forest in Sarawak with 32,265 ha planted as of Dec 2011. Commercial harvesting is expected to begin in 2015 after its first batch of planted forest matures.
Stronger earnings quality; reduced volatility.
A dwindling quota of natural logs in Malaysia and competition from softwood has resulted in earnings cyclicality and stagnation of earnings prospects for Ta Ann in the past. Today, after years of aggressive expansion (since 2000) into oil palm plantations in Sarawak, its oil palm division dominates earnings, contributing 82% and 77% of its 2010 and 2011 PBT.
Oil palm – leading earnings growth
From logger to planter. Ta Ann was one of the earliest among listed Malaysian loggers to venture into the palm oil industry, a vision that will continue to reward shareholders for the foreseeable years. Palm oil provides a steady and growing income source, and has diversified Ta Ann‟s earnings base from pure timber since 2006.
Consistent planting programme, from a low base.
The pure Sarawak planter started its maiden plantation in 2000 and accelerated its planting programme after 2004 (see Figure 2). Ta Ann has planted on average 3,300 ha per year since 2004, compared to an average
new planting area of 1,000 ha between 2000 and 2003. As of 31 Dec 2011, Ta Ann has 30,911 ha of oil palm planted area in Sarawak. This planted acreage puts Ta Ann on par with the likes of TSH Resources (Buy), TH Plant (Hold), and IJM Plantations (Not Rated).
High proportion of immature estates
average age ~5 years. Ta Ann has a relatively higher proportion of immature estates at 39% in 2010 (31 Dec 2011: 33%) compared to its peers (see Figure 4). Its oldest estate is merely 12 years old, and only 14% have reached peak production age (i.e. over 9 years of age - see Figure 1). Hence, with its young weighted age profile of ~5 years, it will continue to enjoy exponential growth at least for the next four years (even if new planting stops now), providing visibility in FFB output and earnings growth
18% 3-year forward FFB growth CAGR.
Given its young palm tree profile, we forecast Ta Ann‟s FFB production to grow at a robust 18% 3-year (2011-14) CAGR, which is among the highest in our universe of coverage (TSH: 19%; SOP: +12%). We expect its FFB production to grow to 760,031 tonnes by 2014 (+65% from 2011 levels). We forecast
the following yearly FFB production and growth:
- 2012: 541,207t (+18% YoY)
- 2013: 653,976t (+21% YoY), and
- 2014: 760,031t (+16% YoY).
The relatively lower FFB production growth of 18% in 2012 stems from a higher base following an impressive 47% growth in FFB output in 2011 to 457,973 tonnes. (Note that our 2012 forecast is approximately 9% below Ta Ann‟s internal forecast of 595,599t. Should Ta Ann‟s internal forecast
materialise, there is further upside to our earnings forecast.)
Double digit FFB growth to last till 2017.
We forecast Ta Ann‟s FFB production to grow at double-digit rates yearly till 2017. This assumes 3,000 ha of yearly new planting between 2012 and 2015, consistent
with the recent historical average. Even without new planting from 2012 onwards, Ta Ann will still enjoy double digit FFB growth till 2014 (see Figure 6).
High yields on peat soil.
Its young palm trees achieved a high FFB yield of 22t/ha/yr in 2011, ahead of our estimates given its place in the yield curve cycle (see Figure 3). We understand its best performing estate achieved >30t/ha/yr. This could be due to the more fertile peat soil and higher density of planted oil palm trees per hectare. 84% of its
planted area is on peat soil, with the remaining land on mineral soil. Ta Ann has applied appropriate land preparation procedures as peat soil necessitates higher compaction. Ta Ann also constructed extensive
drainage since peat area is flatter compared to mineral land.
