TA ANN -- Deteriorated Fundamentals

I spent some time going through Ta Ann annual reports to assess whether there are any gems to be picked up. I was debating whether I should publish what I learned as I concluded that Ta Ann fundamentals have deteriorated mainly due to very unfavorable macro-economics. Today's post is about what not to buy and not what to buy. Read on if you are interested.

Basic information

52wk Low RM 2.20 52wk High 7.45, last closing price 4.60, up 110% from low.

Market capitalization : 984 mln, shares outstanding 214 mln

Ta Ann has three core businesses if you look their 2008 revenue contributions - manufacture and sale of plywood (52%), palm oil(25%) timber concessions, harvesting ans sale of logs(17%).



The logging business is a very profitable business with profit margin of 20-25%, with the CPO hanging around 2,000 - 2,500, it's a low 20% margin. Unfortunately, plywood segment is the biggest revenue contributor but it has most volatile profit margin. You can see the profit has shrunk tremendously despite of the management implement a lot cost cutting measures.



Cost of good sold sky-rocketed due to higher material input, glue and diesel costs. It was really a disaster in 2007, 2008 and going into 2009. The pricing power has been poor due to very poor demand especially their end market is Japan.



See below chart, disastrous Japanese housing starts though it has shown some stabilization.



Gearing was around 0.12x in 2004 but has gone up to 0.55x, debts incurred for plywood and plantation business.

With the margin collapsed in Q1 2009, I feel the share price ran way ahead of itself.



Even the profit can go back up to RM 90 - 100 mln range, the share probably worth about RM 5 - RM 6 / share. Even though the appetite for commodity related stocks is improving, I may consider below RM 3 / share. The rationale mainly due to bigger contribution from plantation and stable logging business while waiting for plywood business to recover.