Ta Ann’s upstream focus to benefit from strong CPO price


TA ANN Holdings Bhd is expected to perform well in 2021 driven by supportive demand-supply (S&D) dynamics and strong prices of edible oils.

RHB Investment Bank Bhd analyst Hoe Lee Leng noted that after imputing the revised crude palm oil (CPO) prices, Ta Ann’s financial year 2021 (FY21) to FY22’s net profit would increase by 6% to 24%.

“We believe the risk for prices will be on the downside from hereon and advocate stocks that are expected to perform in a lower-price environment.

“We like Ta Ann for its pure upstream exposure and undemanding valuation of nine times FY22 forecast (FY22F) price-to-earnings (PE), which is on the lower spectrum of its peer range of nine times to 14 times,” she stated in a research note yesterday.

According to Oil World’s and the US Department of Agriculture’s (USDA) latest forecast, supply of oils and fats and CPO should be relatively tight in 2021, but balanced somewhat by relatively muted demand.

Oil World data showed 17 oils and fats, and 10 oilseeds complexes are expected to see a decline in stock to usage ratios in 2021 with eight vegetable oil complexes flat year-on-year (YoY).

“The largest decline in stock to usage ratios in 2021 should come from soybean, rapeseed and canola crops, which were affected by La Nina and exacerbated by China’s large appetite for soybean due to its feed mill requirements.

“These tight dynamics will likely keep oilseed and vegetable oil prices at relatively high levels throughout 2021,” she added.

Oilseed prices are expected to moderate in 2022 on increased planting.

“For 2022, despite no official forecasts yet from Oil World or USDA, we believe soybean and other oilseed prices will moderate, along with CPO prices.

“This is from oilseeds seeing increased planting activities, to take advantage of current high prices,” she said.

In addition, the US expects to plant 5% more acreage in 2021 and may increase the amount even more in 2022, while South American soybean planting will start in November to December 2021, which will be harvested from May to June 2022 and may increase YoY.

The USDA projects Brazil (the largest producer) to plant 5% more soybeans in 2021-2022.

“With improved supply, soybean prices will likely moderate in 2022. For CPO, we believe the stock to usage ratios will improve in 2022, estimating it to increase to 17% in 2022 forecast (2022F) from 16.2% in 2021F,” she said.

The improved supply will keep CPO prices above the 20-year historical average of RM2,500 per tonne.

“Given the rising stock to usage ratio trend, we believe CPO prices will decline YoY in 2022,” she said.

RHB raised its 2021 to 2022 average CPO price forecast to RM3,200 and RM2,800 per tonne, and the increase in price forecast spells lifting in the FY21-FY22 earnings for TaAnn.

The investment bank maintained a ‘Buy’ rating on Ta Ann with a lower target price (TP) of RM3.45 from the previous TP forecast of RM4.

“We lower our target PE, as valuations will start pricing in environmental, social, and corporate governance concerns, particularly since Ta Ann does not have Roundtable for Sustainable Palm Oil certification, due to its large peat soil exposure.

“Our TP implies nine times FY22F PE, which falls within the lower spectrum of its peer range of nine times to 14 times,” she said.