PPB Group’s associate Wilmar 2H earnings expected to improve

This article first appeared in The Edge Financial Daily, on August 15, 2018.
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PPB Group Bhd
(Aug 14, RM16.88)
Maintain outperform with an unchanged target price of RM18.60:
PPB Group Bhd’s associate, Wilmar International Ltd, recorded a first half of financial year 2018 (1HFY18) core net profit (CNP) of US$410 million (RM1.68 billion), which was broadly in line with expectations at 35% of the consensus’ US$1.16 billion forecast and our US$1.17 billion estimate. Historically, Wilmar’s earnings are stronger in 2H, accounting for 60% to 70% of full-year CNP. Note that, among others, we have excluded a sizeable foreign exchange translation gain of US$109 million from our 1HFY18 CNP calculation. Fresh fruit bunch production at 2.07 million tonnes was also in line at 48% of our 4.32 million tonne estimate. An interim dividend of 3.5 Singapore cents (10.43 sen) was declared, in line with our expectations.

Year-on-year, 1HFY18 CNP declined 5% on lower sales volumes for tropical oil manufacturing and merchandising (-0.2%) and sugar merchandising, refining and consumer products (-12.4%). This was exacerbated by downward trending commodity prices in both the tropical oil and sugar segments. In 1HFY18, crude palm oil (CPO) prices were down by 18%, while raw sugar prices tumbled 27%. Additionally, its others segment saw a 90% plunge in profit before tax owing to poor performances of the group’s investment securities. However, this was partially offset by higher crush margins in the oilseed and grain division. Quarter-on-quarter, CNP declined 70% in the second quarter of financial year 2018 (2QFY18) due to the same reasons above. CPO prices trended 4% lower, while raw sugar prices declined 12% in 2QFY18.

Looking ahead, we believe Wilmar’s earnings in 2HFY18 would improve along with a gradual recovery in commodity prices. Recent developments in the palm oil industry are supportive of CPO prices — India’s recent move to raise import taxes on other vegetable oils, and Indonesia’s push to make biodiesel compulsory for all vehicles and heavy machinery by next month. Earnings in the sugar segment should also improve in 2HFY18, with the commencement of the crushing season in June. Nevertheless, we note that a drawn-out trade spat between China and the US could adversely affect crush margins in the oilseed and grain segment due to lower capacity utilisation.

We reiterate our “outperform” call on PPB, with highlights including the group’s own earnings growth from expansion across its key segments and the upcoming listing of Wilmar’s China business (targeted for FY19 to FY20). The listing could potentially benefit PPB as Wilmar’s management has indicated the likelihood of a special dividend payout post-listing.

Risks to our call include weaker-than-expected crush margins, a crash in commodity prices and lower-than-expected biodiesel quota volumes. — Kenanga Research, Aug 14