PP 7767/09/2010(025354)

30 August 2010

Corporate Highlights
Malaysia
RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
R e su lts N ot e Company No: 233327 -M

30 August 2010
MARKET DATELINE

Ta Ann Holdings Share Price

Fair Value
:
:
RM5.59
RM5.80
Eco Friendly but Not Profit Wise Recom : Market Perform
(Downgraded)

Table 1 : Investment Statistics (TAANN; Code: 5012) Bloomberg: TAH MK

Revenue Net profit EPS EPS Growth PER C. EPS P/NTA Net Gearing ROE GDY
FYE
(RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (x) (%)
Dec
2009a 666.6 63.8 29.7 (11.5) 18.8 - 1.8 0.5 10.5 0.9
2010f 772.8 55.3 25.8 (13.4) 21.7 42.0 1.7 0.5 7.1 0.5
2011f 913.9 103.8 48.4 87.8 11.6 48.0 1.5 0.3 12.4 2.9
2012f 983.8 129.0 60.1 24.3 9.3 61.0 1.4 0.3 14.1 7.2
Main Market Listing /Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Significantly below. Stripping off forex loss of RM4.7m, Ta Ann’s RHBRI Vs. Consensus
1HFY12/10 core net profit of RM20.1m (-2.6% yoy) was significantly below Above

our and consensus expectations, accounting for just 21-22% of our and In Line
Below
consensus forecasts respectively. Key variance was mainly due to continued
losses in its plywood division (vs. our forecast of RM10-15m profit before tax Issued Capital (m shares) 214.6
for FY10), where cost of production was higher as a result of a product mix Market Cap (RMm) 1199.6
Daily Trading Vol (m shs) 0.03
shift, despite higher average selling prices achieved. Besides this, log
52wk Price Range (RM) 4.17-6.10
production was also lower than expected due to the exceptionally wet
Major Shareholders: (%)
weather. Mountex Sdn Bhd 22.21
♦ Lower log production. As a result of the lower log production, Ta Ann Datuk Wahab b Hj Dollah 11.67
experienced a significant drop in log exports (-19% yoy). As such, we have Datuk Abdul Hamed 9.37
reduced our log production assumption for FY10 to 450k m3 (from 500k m3
FYE Dec FY10 FY11 FY12
previously), while maintaining our FY11-12 forecast. We also adjust Ta Ann’s
EPS chg (%) -42.4 -14.1 -19.1
logs export sales to reflect the recent one-year extension of 50% export Var to C.EPS (%) -38.6 0.1 -1.5
quota by the Government.
♦ Tasmania dragging plywood division. Average selling prices for Ta Ann’s
PE Band Chart

plywood division rose by 17% qoq (from US$408/m3 to U$477/m3),

resulting in a 20% yoy rise in revenue. However, EBIT margins fell by 3.7%- PER = 20x
pts, due to a product mix shift to floorbase plywood made from Tasmanian PER = 15x
PER = 10x
eco-friendly raw materials, which are more costly, causing cost of production
to increase by 15% qoq (from US$421/m3 to US$483/m3) in 2Q10. To
reflect the higher selling prices and the shift in product mix, we have raised
our forecast for FY10-12 average selling prices for its plywood division by
3.4-4.9%, and FY10-12 cost of production by about 24%. We are now
projecting a loss before tax of RM40-45m for its plywood division in FY10, as
Relative Performance To FBM KLCI
opposed to a profit previously.
♦ Forecasts. We reduced our earnings forecasts by 14-42% for FY10-12
after: 1) Increasing our average selling prices and cost of production for its Ta Ann Holdings

plywood division; 2) Lowering log production in FY10 and adjusting for an

increase in export quota; and 3) Updating our US$/MYR assumptions to
RM3.15/US$ in CY10 (from RM3.25/US$), RM3.10/US$ in CY11 (from FBM KLCI

RM3.20/US$) and RM3.10/US$ in CY12 (from RM3.15/US$), in line with

RHBRI’s economics team forecasts.
♦ Risks to our view include: 1) timber and CPO prices falling; and 2) a
slower-than-expected recovery in Japan’s economy.
♦ Investment case. Following our earnings revision, our SOP-based fair value Hoe Lee Leng
is reduced to RM5.80 (from RM6.95) based on unchanged 12x FY11 timber (603) 92802158
division earnings and 12x FY11 plantation division earnings (see Table 5). As hoe.lee.leng@rhb.com.my
such, we have downgraded our Outperform recommendation for the stock to
Market Perform.

Please read important disclosures at the end of this report. Page 1 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 30 August 2010

Table 2: Earnings Review (YoY)

2009 2010 2010 % chg % chg 2009 2010 % chg
FYE Dec Observation/ Comments
2Q 1Q 2Q QoQ YoY 1H 1H YoY
(RMm)
Revenue 162.0 179.9 187.8 4.4 16.0 298.3 367.7 23.3 Higher topline due to qoq rise in
average selling prices for logs
- Timber 119.0 130.5 136.3 4.4 14.5 222.7 266.8 19.8
(17%), plywood (17%); as well as
- Oil palm and 39.3 48.8 51.2 5.0 30.2 69.6 100.0 43.6 logs sales volume (8%) and FFB
reforestation production (13%); offset by lower
plywood sales volume (-15%)
- Property devt 3.6 0.6 0.3 (49.2) (91.1) 6.1 1.0 (84.2)
EBIT 34.5 14.3 13.6 (4.9) (60.5) 48.3 27.9 (42.2) Refer to EBIT margin below.

Finance cost (1.9) (2.5) (3.4) 33.2 79.9 (4.2) (5.9) 39.2
Associates (0.1) 0.0 0.0 - - (0.2) 0.0 -
EI 7.7 (1.2) (3.4) >(100) >(100) 10.8 (4.7) >(100) Forex loss on yen-denominated
borrowings.
PBT 32.5 11.8 10.2 (13.1) (68.5) 43.9 22.0 (49.8)

PBT ex-EI 24.8 13.0 13.7 5.2 (44.8) 33.1 26.7 (19.3) Filtered down from EBIT
Taxation (7.2) (4.3) (3.2) (26.3) (55.6) (10.6) (7.6) (28.7)
MI (2.5) 0.5 0.4 (20.3) >(100) (1.8) 1.0 >100
Net profit 22.8 8.0 7.5 (6.3) (67.1) 31.5 15.5 (50.9)
Net profit ex-EI 15.1 9.2 10.9 18.6 (27.4) 20.7 20.1 (2.6) Filtered down from PBT but with
lower effective tax rate.

EPS (sen) 10.6 3.7 3.5 (6.2) (67.1) 14.7 7.2 (50.9)
Gross dividend 3.0 3.0 0.0 - - 3.0 3.0 0.0
EBIT margin (%) 21.3 8.0 7.3 (0.7) (14.1) 12.6 8.9 (3.7) Lower EBIT margin due to
significant yoy drop in log export
and higher raw material input cost
for plywood production, together
with EI loss of RM4.7m. Despite
higher selling price for plywood,
cost of production was also higher
mainly due to increased usage of
more costly eco raw material from
Tasmania

Adj PBT margin 15.3 7.2 7.3 0.1 (8.0) 11.1 7.3 (3.8)
(%)
Adj Net profit 9.3 5.1 5.8 0.7 (3.5) 10.6 4.2 (6.3)
margin (%)
Effective tax rate 29.1 33.4 23.4 (10.0) (5.7) 32.0 28.3 (3.7)
(%)

Other
information
Average plywood 375.0 408.0 477.0 16.9 27.2 387.5 440.0 13.5 Qoq, higher average selling prices
prices (US$/m3) due to change in product mix to
more sales of eco-plywood
floorbase
Sales of plywood 47.7 69.3 59.1 (14.7) 24.0 99.6 128.5 28.9 Sales volume on YoY basis
('000m3) improved, which we believe was
mainly due to gradual increase in
demand
FFB prdtn volume 43.8 53.2 60.1 12.9 64.8 75.9 113.3 49.3 YoY, higher FFB production due to
(‘000 mt) increase in mature hectarage.

Source: Company, RHBRI

Page 2 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 30 August 2010

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 666.6 772.8 913.9 983.8 Average blended plywood 461 477 490
prices (US$/m3)
Turnover growth (%) (9.9) 15.9 18.3 7.6 Average log prices (US$/m3) 185 185 180
Average CPO prices (RM/mt) 2,500 2,700 2,500
Cost of Sales (496.8) (619.0) (661.1) (690.2)
Gross Profit 169.9 153.9 252.9 293.5 Plywood production volume 247,500 264,000 280,500
(m3)
Logs production volume (m3) 450,000 500,000 500,000
EBITDA 160.2 138.4 207.2 244.3 CPO production volume (mt) 77,121 77,121 75,240
EBITDA margin (%) 24.0 17.9 22.7 24.8
RM vs US$ 3.15 3.10 3.10
Depr&Amor (54.3) (56.0) (60.1) (63.7)
Net Interest (9.6) (10.5) (10.5) (10.5)
Associates (0.1) (0.1) (0.1) (0.1)
EI 10.6 0.0 0.0 0.0

Pretax Profit 96.2 71.8 136.5 170.0

Tax (23.2) (18.0) (34.1) (42.5)
Minorities 1.4 1.4 1.4 1.4
Net Profit^ 63.8 55.3 103.8 129.0
Source: Company data, RHBRI estimates
^Core net profit

Table 5: Sum-of-parts valuation

PE (x) Total (RM’m)

Timber division 12x FY11 earnings 357.3

Plantation 12x FY11 earnings 888.1
Total 1,245.3

Outstanding shares (mil) 214.6

Fair value (RM/share) 5.80

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

Page 3 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 30 August 2010

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

Page 4 of 4

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com